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[COMMITTEE PRINT]

THE PENN CENTRAL FAILURE AND THE
ROLE OF FINANCIAL INSTITUTIONS
PART

III

PENPHIL: THE MISUSE OF CORPORATE
POWER

STAFF REPORT OF THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
92d Congress, First Session

FEBRUARY 15, 1971

Printed for the use of the Committee on Banking and Currency
U.S. GOVERNMENT PRINTING OFFICE
55-559

WASHINGTON : 1971

For sale byjthe Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 - Price 40 cents




COMMITTEE ON BANKING AND CURRENCY
WRIGHT PATMAN, Texas, Chairman
WILLIAM A. B A R R E T T , Pennsylvania
LEONOR K. (MRS. JOHN B.) SULLIVAN,
Missouri
H E N R Y S, REUSS, Wisconsin
THOMAS L. ASHLEY, Ohio
WILLIAM S. MOORHEAD, Pennsylvania
R O B E R T G. S T E P H E N S , JR., Georgia
F E R N AND J. ST GERMAIN, Rhode Island
H E N R Y B . GONZALEZ, Texas
JOSEPH G. M I N I S H , N e w Jersey
RICHARD T . HANNA, California
TOM S. G E T T Y S , South Carolina
F R A N K ANNUNZIO, Illinois
THOMAS M. REES, California
TOM BEVILL, Alabama
CHARLES H. G R I F F I N , Mississippi
JAMES M. H A N L E Y , New York
F R A N K J. BRASCO, New York
BILL CHAPPELL, J R . , Florida
EDWARD I. KOCH, New York
WILLIAM R. COTTER, Connecticut
P A R R E N J. MITCHELL, Maryland




WILLIAM B . WIDNALL, New Jersey
F L O R E N C E P . DWYER, New Jersey
A L B E R T W. JOHNSON, Pennsylvania
J. WILLIAM STANTON, Ohio
BENJAMIN B . B L A C K B U R N , Georgia
G A R R Y BROWN, Michigan
LAWRENCE G. WILLIAMS, Pennsylvania
CHALMERS P . WYLIE, Ohio
M A R G A R E T M. H E C K L E R , Massachusetts
P H I L I P M. C R A N E , Illinois
JOHN H . ROUSSELOT, California
STEWART B. McKINNEY, Connecticut
NORMAN F. L E N T , New Yoik
BILL A R C H E R , Texas
BILL F R E N Z E L , Minnesota

PAUL NELSON, Clerk and Staff Director
CURTIS A. PRINS, Chief Investigator
BENET D. GELLMAN, Counsel

JOSEPH C. LEWIS, Professional Staff Member
GARY TABAK, Counsel

ORMAN S. FINK, Minority Staff Member

(n)

LETTER OF TRANSMITTAL
FEBRUARY 15,

1971.

To the Members of the House Committee on Banking and Currency:
Transmitted herewith for use of the Banking and Currency Committee and the Congress is Part I I I of the staff report on The Penn
Central Failure and the Role of Financial Institutions.
Part I I I constitutes a classic example of the use of corporate power
for personal profit. In effect, it is the chronicle of how two men,
David C. Bevan, the former chief financial officer of the Penn Central,
and Charles J. Hodge, the former chief investment advisor of the
Railroad, manipulated the financial resources, the assets and the
credit of the nation's sixth largest corporation for the benefit of an
investment company, Penphil, which they established and directed.
The ultimate goal of Bevan and Hodge was to create a large conglomerate operating and holding company while orchestrating Penn Central
investments in a way that would serve the interests of Penphil. In
an overall sense, the history of Penphil is not only the story of monumental disservice to the Penn Central, the nation's largest transportation system; it is a detailed record of activities which distorts the
concept of the democratic free enterprise system.
The key factors which made the establishment and growth of
Penphil possible were the unrestricted line of credit provided Penphil
by the Chemical Bank New York Trust Company—a line of credit
that was based primarily on the large loan and deposit accounts maintained in the bank by the Penn Central—and the manipulation of
Penn Central investments by Bevan and Hodge. In this connection,
Penphil's ability to control corporations in which it held common
investments with the Penn Central was enhanced by the fact that
the membership of Penphil included some of the chief officers of these
corporations.
Chemical bank loans to Penphil were made on such favorable terms
that they played a large role hi enabling most Penphil members to
claim a profit of $83,500 on a cash investment of $16,500. Moreover,
Chemical extended its million dollar line of credit to Penphil without
any regard for the fact that the company's investments placed David
Bevan and other Penn Central officials in basic conflict-of-interest
situations. This is so, even though Bevan, at one point, openly
acknowledged that a conflict-of-interest may have existed regarding
Penphil's investments in the Great Southwest Corporation, which is
controlled by the Penn Central. Indeed, it is because of Chemical's
open line of credit to Penphil that this and other conflict-of-interest
situations could and did exist.
The dual roles played by Bevan and Hodge—controlling Penn
Central investments in a way designed to benefit Penphil, which they
also controlled—involved the manipulative use of Penn Central pension funds on which thousands of persons depend to sustain themselves




(311)

IV

in retirement. The question continually arises throughout Part I I I of
the staff report: How could David Bevan simultaneously fulfill his
fiduciary responsibility to Penn Central, to the beneficiaries of the
pension funds under his control, and to the corporations in which the
Penn Central had made heavy investments and whose boards were
controlled by Bevan and Hodge by virtue of interlocking alliances and
directorships? The question is repeatedly answered in a number of
instances in this report; the details of the transactions disclose that
Penphil stood to be the ultimate beneficiary.
The investigation of the Penn Central thus far has illustrated the
undeniable need for legislation to accomplish the following:
1. Require examination by Federal bank supervisory agencies of
loans and other financial transactions between individuals and commercial banks when these same lending institutions are providing
loans and other financial services to commercial and industrial entities
in which these individuals or members of their families serve as
officers, directors or employees.
2. Require full disclosure of the makeup of pension fund assets, and
the sale and purchase of pension fund assets, when such lending
institutions act as administrators of such pension funds.
3. Prescribe limitations on the investment of pension fund assets in
any single enterprise to help assure that such funds are prudently
invested in all cases where Federally regulated lending institutions
act as administrators of pension funds.
In addition, the Penphil case should be examined by law enforcement and regulatory agencies on both the Federal and state level to
determine whether there have been violations of securities, transportation or other laws and regulations.
The views and conclusions found in this staff report do not necessarily express the views of the Committee or any of its individual
members.




W R I G H T PATMAN,

Chairman.

CONTENTS
Page

Summary and conclusions
Establishment of Penphil
Penphil investment program
Chemical Bank supplies the funds
Common investments of Penphil and Penn Central
Common investments—Two classifications
Mystery of Penphil
Kaneb Pipe Line Co
Continental Mortgage Investors and National Homes Corp
Penphil investment in Great Southwest Corp
Great Southwest Corp
Penphil and Penn Central purchase GSC stock
Penphil involvement with GSC
Penphil sells its GSC stock
Conflicts of interest?
David Bevan's position
GSC epilogue
Tropical Gas Co., Inc
Tropical epilogue
Penphil's Florida bank involvement
Interlocking relationships with Arvida
Holiday International Tours
Turning Penphil into a conglomerate
Decision to keep Penphil going

1
5
9
10
15
19
19
22
25
27
27
27
28
30
30
30
31
32
41
41
49
56
57
59

LIST OF TABLES
Chart.
Table 1.
Table 2.
Table 3.
Table 4.
Table 5.

Sources of funds, interlocks, and Penphil investments (fold-in)
facing page
Penphil loans from Chemical Bank and stock purchases
Common investments of Penphil and Penn Central
Penn Central stockholdings in five companies in which Penphil
invested
Penphil group stockholdings in Kaneb Pipe Line Co
Penphil group stockholdings in noninterlocked companies




'V)

2
11
16
18
24
26

T H E P E N N CENTRAL FAILURE A N D THE ROLE OF
F I N A N C I A L INSTITUTIONS
PART III
P E N P H I L : T H E M I S U S E OF CORPORATE POWER

SUMMARY AND CONCLUSIONS

"The Penphil Corporation was a small, informal investment company set up by a number of us who were linked
by friendship to invest for capital appreciation. I t was a very
small affair and run quite informally. I was a stockholder."
—David Bevan testifying before
the Commerce Committee,
U.S. Senate, August 6,1970.
11
* * * actually we are thinking in terms of having a
large number of shares of Penphil outstanding and going, you
might say, public ultimately with Penphil and turn it at the
same time into an aggressive acquirer of other companies
so that we can build it up into a very substantial conglomerate
holding and operating company."
—David Bevan in a letter to
Charles Hodge dated July
31, 1967.
Despite public statements to the contrary, it is clear from a careful
examination of the operations of the Penphil Company that it was
intended to be, and was in fact, far more than an investment club.
Penphil, originally established in 1962 by David Bevan and Charles
Hodge along with fourteen business associates and friends, was intended to be the principal vehicle by which control of important
corporations was to be gained through various devices. In order to
carry out this plan, it was necessary to acquire a substantial line of
credit for Penphil. This was acquired by David Bevan and Charles
Hodge from the Chemical Bank of New York City on an unusually
favorable basis beginning in August 1962. This major lending institution, having provided more than $1.8 million in loans to Penphil over
a period of seven years, played an essential role in making the overall
plan work. Without this line of credit, it is doubtful that the members
of Penphil would have been willing to put up the liquid assets necessary to carry out the plan. The $1.8 in Chemical Bank loans was the
primary factor that has allowed Penphil investors to realize a 600
percent profit on their initial investment of $16,500 each in less than
8 years.




(1)

2
Another very important aspect of the Chemical Bank loan to Penphil should be highlighted. I t was, to say the least, a highly concessionary loan agreement: (1) there were no formal loan procedures or
payment schedules; (2) the line of credit was at the prime rate,
although usually such loans would have been at a minimum of one
percentage point above prime; (3) there was no compensating balance
asked or required for these loans, although a 20-percent compensating
balance would have been normal for a loan from a big New York bank.
I t is clear, therefore, that the $1.8 million in loans to Penphil were
not made by Chemical Bank on the basis of the soundness of the line
of credit. They were made on preferential terms, as compared to loans
of a similar nature, because of the value to Chemical Bank of Penn
Central's loan and deposit business. In effect, it was Penn Central's
compensating balances, interest payments and deposits that were
subsidizing the Penphil line of credit for the personal profit of Penphil
members.
I t is also clear from an examination of the facts t h a t Penphil was
run almost exclusively by two men—David Be van and Charles
Hodge—despite the fact that its membership varied from 16 to 26
persons from its founding to the present time. Bevan and Hodge between them had access not only to bank credit but also to large sums of
investable assets through such entities as the Penn Central Supplemental Pension Plan, with assets of more than $300 million, and the
Penn Central Contingent Compensation Fund, with assets of over
$11 million, along with the substantial assets of Glore Forgan, a major
investment banking concern in which Hodge was a partner.
Thus, to a large extent, other peoples' money was being used to
finance investments in certain selected companies for the purpose
of permitting Penphil and those associated with it to control these
same companies. Such activity raises extremely serious questions,
especially when considering the fiduciary responsibility involved in
managing the investments of a pension fund, on which thousands of
actual and potential pensioners are relying for their income in retirement.
In addition to the questionable use of other people's money for the
benefit of personal financial gain and personal interests, a number of the
situations discussed in this report raise serious issues concerning the
use of insider information to benefit the members of Penphil. This
includes the purchase by Penphil of Great Southwest Corporation
stock and its subsequent sale seventeen months after Penn Central
gained control of Great Southwest. On this sale, Penphil realized a
net profit of $212,500, a 130 percent return on its investment in less
than 2% years.
Another case in point is the investment by Penn Central through
the supplemental pension plan in the stock of Tropical Gas, a company
in which Penphil members held five of the ten director seats. The
purchase of a large number of shares of Tropical Gas stock during a
twenty-five day period in September and October of 1968 was a
highly disadvantageous investment to the Penn Central Supplemental
Pension Plan because Tropical Gas had already planned to make a
new offering of stock on October 15, 1968, 25 days after the pension
fund began increasing its investment in Tropical stock by more than




SOURCES OF F U N D S , INTERLOCKS AND P E N P H I L INVESTMENTS
SOURCES

OF

FUNDS

INDIVIDUALS

CONTROLLING

INVESTMENTS

PENPHIL COMPANY

TRUST COMPANY
Provided loans to Penphil
for investment purposes.




PENN CENTRAL TRANSPORTATION CO.
Sources of Funds Used for
Investment Purposes
—Contingent Compensation Fund
—Employees Supplemental Pension
Plan
—Pennsylvania Company
—Buckeye Pipe Line Company
(Employees Benefit Funds)

GLORE FORGAN
-Company's own investments
-Personal investments of officers
Other Tie-ins
-Investment advisor to Perm Central
-Investment banker for Kaneb,
Tropical, and Great Southwest

IN

-Two interlocks with Penphil.
-One interlock with Penn Central.
-One interlock with Tropical.
-Glore Forgan served as investment
banker.

INVESTMENTS
—Great Southwest Corp.
—Kaneb Pipe Line Co.
—Tropical Gas Co., Inc.
—Continental Mortgage Investors
—National Homes Corp.
—University National Bank of
Boca Eaton, Florida
—First Bank and Trust Co. of
Boca Raton (N.A.), Florida
—Holiday International Tours

INVESTED

KANEB PIPE LINE CO.

Private investment club consisting of 26 individuals
CHEMICAL BANK NEW YORK

COMPANIES

GREAT SOUTHWEST CORP.
DAVID SEVAN
-Founded Penphil and controlled its
investment program.
-Chief Financial Officer of Penn C e n t r a l Controlled all of Penn Central's investments, including those made by the
Supplemental Pension Plan and the
Contingent Compensation Fund.
-Director of:
Kaneb Pipe Line Co.
Great Southwest Corporation.
Tropical Gas Co., Inc.
Arvida Corporation.
CHARLES HODGE
-Major principal in the establishment of
Penphil and the control of its investment program.
-Principal officer of Glore Forgan.
-Financial advisor to Penn Central.
-Officer and director of Great Southwest
Corp.
-Director of:
Tropical Gas Co., Inc.
Executive Jet Aviation.
Arvida Corporation.

-Four interlocks with Penphil.
-Four interlocks with Penn Central.
-One interlock with Glore Forgan.
-Glore Forgan served as investment
banker.

TROPICAL GAS CO., INC.
-Six interlocks with Penphil.
-One interlock with Penn Central.
-Three interlocks with Glore Forgan.
-Glore Forgan served as investment
banker.

UNIVERSITY NATIONAL BANK
OF BOCA RATON, FLORIDA
and
FIRST BANK AND TRUST CO.
OF BOCA RATON (N.A.),

ARVIDA CORPORATION
-Controlled by Penn Central
-Considerable real estate development activity in Boca Raton,
Florida
-Six interlocks with Penphil
-Four interlocks with Penn Central
-One interlock with Glore Forgan

FLORIDA
-Each bank had two interlocks
with Penphil.

HOLIDAY INTERNATIONAL TOURS
-Company established and controlled
by Penphil.
-Primary purpose to serve as general
sales agent for International
Air Bahama.

EXECUTIVE JET AVIATION
-Controlled by Penn Central.
-Controlled International Air
Bahama.
-Three interlocks with Penphil.

3
$1 million. This new issue would have inevitably diluted the value
of the outstanding Tropical stock after the pension fund purchase
was made. Bevan and Hodge, members of TropicaPs Executive Committee, knew of the plans for the new issue before the pension fund
started buying Tropical stock in September 1968 but did nothing to
prevent this harmful action from taking place.
These purchases of Tropical stock also occurred immediately prior
to an attempted takeover of Tropical Gas by another corporation,
Mapco, thus raising the question of whether Bevan and Hodge were
using the Penn Central pension fund (1) to protect Tropical Gas
from a takeover rather than managing the pension fund strictly as
an investment for the best interests of the beneficiaries of that fund,
and (2) help maintain PenphiFs ability to control Tropical.
Another questionable activity carried out by Penphil in connection
with investments of the Penn Central Company was PenphiFs purchase of large blocks of stock in two banks in Boca Raton, Florida, at
a time when the Penn Central subsidiary, Arvida, was carrying out
an intensive program of real estate development in the Boca Raton
area. Was this Penn Central investment in Arvida pursued at least
partly to enhance the value of Penphil investments in the same area?
As a result of the dramatic growth in the Boca Raton area, partly
based on Arvida's development program, the value of PenphiFs bank
investment grew by over $800,000, or more than 191 percent in a little
over three years.
The view has been widely held that Penn CentraFs investment
decisions in the last few years made in connection with its diversification program seemed simply to have reflected bad judgment
by management. However, a detailed examination of the facts presented in this report indicates that these decisions make a great deal
more sense when viewed in the light of the interests and goals of
Penphil and its members. Some of these questionable investments are
highlighted in the schematic chart facing page 2, indicating the
principal relationships described in the body of this report.
A number of broader questions are raised by the activities of
Penphil as described in the body of this report. Among these are:
(1) The propriety of commercial banks making substantial
preferential loans to individuals for their personal use and profit
on the basis of their positions as influential officers or directors
of the bank's major corporate customers.
(2) The inherent conflict of interest involved in the same
person carrying out at the same time such potentially conflicting
roles as chief financial officer of a major corporation, a principal
in the investment management of millions of dollars of trust
funds held for the benefit of others; a principal in the investment
of funds for a private investment company designed to develop
into a significant holding and operating company; and an active
director in companies over which control by the budding holdinginvestment company is sought.
(3) The question of making personal profits on the basis of insider information obtained while trying to carry out one's
fiduciary responsibility as a corporate officer and/or director.

55-559—71



2

4
(4) The propriety of one individual acting as an investment
advisor, investment banker and broker for a number of corporations and others entitled to sound and, above all, objective
investment advice, at the same time becoming personally involved
in the management and control of corporations through large
equity interests, directorships and other close relationships.
Classic examples of such problems described above can be found
in the roles played by David Be van and Charles Hodge in connection
with the operation of Penphil.
David Be van was (1) The Chief Financial Officer of the Penn
Central Company; (2) the Chairman of the management committee
for the Penn Central Supplemental Pension Plan and the administrator of the Penn Central Contingent Compensation F u n d ; (3) a
founder of, a stockholder in and a chief investment advisor to Penphil;
(4) on the Board of Tropical Gas; (5) on the Board of Great Southwest Corporation; (6) on the Board of Kaneb Pipe Line Company;
and (7) on the Board of Arvida Corporation.
To whom did David Be van owe his greatest fiduciary responsibility? A fiduciary responsibility is not supposed to be divisible, i.e.
one who has a fiduciary responsibility is not supposed to put himself
in a position of divided loyalty. I t would seem to be impossible for
one in the position t h a t David Bevan was in to faithfully carry out
his duty to all the parties to whom he owed a fiduciary responsibility.
Similar questions can be raised for other persons involved with the
Penphil-Penn Central-Glore Forgan complex.
Similarly, Charles Hodge and/or his investment banking firm were
(1) the principal investment advisor to Penn Central; (2) investment
advisor to and broker for the Penn Central Supplemental Pension
Plan and the Contingent Compensation Fund; (3) investment banker
for Kaneb Pipe Line, Tropical Gas and Great Southwest Corp.; (4) a
director of Great Southwest Corp., Arvida Corp. and Tropical Gas;
and (5) holders of substantial investments in Kaneb Pipe Line,
Tropical Gas and Great Southwest. How could Charles Hodge give
sound objective investment advice to clients of Glore Forgan concerning their investments while being so personally involved in the
management and control of these significant corporations?
Extremely serious questions of public policy are raised by the story
told in detail in the body of this report. Serious consideration should be
given to enacting legislation adequately safeguarding the public, users
of bank credit, clients of investment bankers and advisers, stockholders, and beneficiaries of pension funds and other trusts, from the
serious abuses that appear to have occurred as a result of the kind of
conflict of interest and insider trading activity that resulted from the
operation of Penphil.




5
ESTABLISHMENT OF PENPHIL

Penphil was incorporated in Pennsylvania on July 10, 1962, as an
investment company. Initially, there were sixteen investors. Subsequent additions, less deletions, have raised the total number of
investors to 26.
A list of Penphil investors along with their principal business
positions, the number of shares owned in Penphil and the date on
which they were acquired is shown on pages 6 to 8.




Name

David C. Bevan

Thomas R. Bevan
Warren H. Bodman
Francis A. Cannon
Paul D. Fox (Retired)
William R. Gerstnecker
Robert Haslett
Mrs. Marie L. Hodge

Frederick B. Holmes
Benjamin F. Sawin
Mrs. Dorothy B. Stevens
Mrs. Dorothy H. Warner




Position

Formerly—Chairman of the Finance Committee and
Member of Board of Directors, Penn Central
Chairman, Manager of Pensions of Penn Central
Director of Pennsylvania Company, Arvida, Great
Southwest, and various other subsidiaries of Penn
Central
Director of Tropical Gas Co., Inc., and Kaneb Pipe
Line Co.
Brother of David Bevan
Partner in law firm of Duane, Morris & Heckscher
Partner, Yarnall, Biddle & Co
Administrative V. P., First Boston Corp
Vice President, Administration, Penn Central
Vice Chairman, Provident National Bank 1
Former V.P.-Corporate, Penn Central;
Formerly Director, Arvida, Great Southwest
Vice President, Investments, Penn Central
Wife of Charles J. Hodge of F. I. duPont-Glore Forgan
& Co.,—a Director of Arvida, Great Southwest and
Tropical Gas
Former Director of Executive Jet Aviation
V.P., Gladfelter Paper Company
Chairman of the Board, Provident International Corp..
Wife of Lawrence M. Stevens, deceased former partner,
Hornblower & Weeks-Hemphill, Noyes
Wife of Theodore K. Warner, former V .P.—Accounting
and Taxation, Penn Central

Number
of shares

Date acquired

3,300

Sept.

7,1962

3,300

Sept.

7,1962

3,300
3,300
3, 100
3,300

Sept.
Sept.
Sept.
Sept.

7,
7,
7,
7,

1962
1962 o
1962
1962

3,300 Sept. 7, 1962
3,300 Sept. 7, 1962

3,300 Sept. 7, 1962
3,300 Sept. 7, 1962
3,300 Sept. 7, 1962
3, 300

Sept. 7, 1962

Angus G. Wynne, J r
Fred H. Billups (recently deceased).
Herbert E. Fisher
Edwin B. Horner
H o b a r t C . Ramsey
Samuel A. Breene
Joseph W. Davin
O. F. Lassiter
Alfonso Manero
Harry F . Ortlip
Brown L. Whatley
Cornelius A. Dorsey
Thomas F . Fleming, Jr
Vincent G. Kling
1

President and Chief Executive Officer, Great Southwest; Director, Arvida
Formerly—^President, Tropical Gas; Director of Executive Jet Aviation
Chairman of the Board, Kaneb Pipe Line Co.; President
& Chairman of the Board, Pipe Line Technologists,
Inc.
First Colony Life Insurance Co
V.P., Glore Forgan
Attorney, Oil City, Pennsylvania
First V.P., Stockton, Whatley, Davin & Co
V.P. and Director, Arvida.
Formerly—President, Executive Jet Aviation
Retired partner of Glore Forgan
President, Harry T. Ortlip Co. (Box Hill Realty)
President, Arvida; Chairman of Board, Stockton,
Whatley, Davin & Co.
Assistant to Robert Haslett, Penn Central
Chairman of Board, First Bancshares of Florida, Inc
Architect

William R. Gerstneckcr announced his resignation as Vice Chairman of the Provident National Bank on January 10.1971,




3,300

Sept. 21, 1962

3, 000

July

1, 1963

3, 300

July

1, 1963

3, 300
3,300
3, 300
577

July 1, 1963
July 1,1963
June 1, 1967
Feb. 19, 1968

408
407
1, 323
1,323

Feb.
Feb.
Feb.
Feb.

715
2, 285
3, 300

August 1968
August 1968
Feb. 26, 1969

19, 1968
19,1968
19, 1968
19,1968

M

In addition to the above, the four individuals listed below were members of Penphil at one time:
Name

Edward D. Meanor (Deceased)
John K. Acuff (Deceased)
C. Carroll Seward
Leslie M. Cassidy (Deceased)

Position

Period during which a Penphil stockholder

Investments
Brooke, Sheridan, Bogan & Co.,
Inc.
Yarnall, Biddle & Co
Former Chairman of Johns-Manville
Corp.

Sept. 7, 1962-Dec. 1966
Sept. 7, 1962-Dec. 1964
<*>
Sept. 7, 1962-Jan. 6, 1969
Sept. 7, 1962-Feb. 7, 1967

There are one million shares of Penphil common stock authorized, with a par value of $2.00 per share. At present,
there are about 69,000 shares issued and outstanding.




PENPHIL INVESTMENT PROGRAM

Primarily with funds obtained through loans from Chemical Bank in New York, Penphil made eight major
stock investments between 1962 and 1969, as detailed below.

Name of company

Kaneb Pipe Line Co
Tropical Gas Co., Inc.2
Continental Mortgage Investors
Great Southwest Corp
First Bank & Trust Co. of Boca Eaton 4 4
University National Bank of Boca Raton
National Homes Corp
Holiday International Tours

Number of
shares
acquired

*
3

488
000
000
000
380
868
5,000
51, 000

i Penphil also holds warrants to purchase 7,653 additional shares of Kaneb common
stock.
2 Exchanged for 8,900 shares of U.S. Freight Co. as result of merger with Tropical in
October 1969.




Date acquired

Price paid

July 25, 1962 to Apr. 7, 1963__
Aug. 6, 1963 to Sept. 5, 1963—
May26, 1964
July 18, 1963
Oct. 13, 1966 to Sept. 10, 1968_
Jan. 24, 1967 to Apr. 7, 1967__.
June 5, 1968 to June 6, 1968___
Feb. 21, 1968

$153, 247
191,495 o
196 800
165 000
332 924
94 184
74 370
25 000

3 Now 60,000 shares as a result of a 2-for-l stock split in January 1970.
'Merged with 2 other Florida banks into First Bancshares of Florida, Inc., a registered
bank holding company, in 1970.

10
CHEMICAL BANK SUPPLIES THE FUNDS

A description of how Penphil and Chemical Bank got together and
how Penphil used the power of the Pennsylvania Railroad (subsequently the Penn Central Transportation Co.) to promote favorable
loan conditions for itself is contained in a Chemical interoffice memorandum written in 1962 by C. A. McLeod, now Vice President of
Chemical's International Division, and distributed to W. S. Renchard,
now Chairman of Chemicars Board of Directors, and M. A.
Chamberlain, Vice President of the bank's Metropolitan Division.
The memorandum states in part:
David Bevan, financial vice president of the Pennsylvania Railroad
Company, called me on the telephone today and said that he and a
group of friends, totaling about fifteen, are planning to organize a corporation to purchase a substantial block of common stock of Kaneb Pipe
Line Company [PenpmTs first investment]. The group will include
Charlie Hodge of Glore Forgan and Company, Benjamin F. Sawin,
president of Provident Tradesmen's Bank and Trust Company [now
Provident National Bank], Messrs. Gerstnecker and Haslett of the
Pennsylvania Railroad's financial staff and others.
Frankly the rate [prime rate] on the proposed loan is too low, but, in
view of the size of the deal and the fact that it has such good friends
connected with it, WSR [ W. S. Renchard, Chairman of Chemical's Board
of Directors] felt it was preferable not to quibble with Mr. Bevan over
the rate. He indicated that George Bartlett of Glore Forgan and Company would probably be the one to negotiate the purchase of the stock
and very likely Charlie Hodge would be the one to work out the mechanics of the loan arrangement.

In effect, the mechanics that were worked out on the loans, which
totaled more than $1.8 million, consisted of establishing an open-ended
line of credit without any prescribed requirements regarding the payment of interest or principal. Until last June, all loans made to Penphil
under this line of credit were at the prime rate—the lowest interest
rate available to the largest and most secure borrowers of the bank.
Stock purchased with the Penphil loans was used as collateral to secure
the loans themselves. Chamberlain, who supervised the Penphil
account for Chemical, has stated that the rate went to one point above
the prime rate in June 1970 because money was very tight at that time.
The following table shows PenphiPs loans from Chemical Bank
and stock purchases:




TABLE

1.—Penphil loans from Chemical Bank

Schedule of Penphil loans from
Chemical Bank 2
Date
of loan

Aug. 20, 1962
Feb. 8, 1963
July 25, 1963
Aug. 6, 1963
Aug. 8, 1963
Aug. 14, 1963
Aug. 16, 1963
Aug. 26, 1963
September 1963
Sept. 11, 1963
Sept. 13, 1963
Sept. 20, 1963
Mar. 24, 1964
M a y 25, 1964
Dee. 29, 1965
Sept. 15, 1966
June 29, 1967
Oct. 17, 1967
Nov. 2, 1967
Nov. 3, 1967
See footnotes at end of table, p. 12.




Amount
of loan

1

and stock

purchases

Schedule of Penphil stock purchases
Date of
purchase

$102,000.00 July 25, 1962___
40, 000. 00 July 26, 1962
115,000.00 July 27, 1962
5,000.00 Feb 7, 1963.
47,450.00 July 18, 1963_
25, 012. 30 Aug. 1, 1963_.
27, 187. 50 Aug. 7, 1963__
30, 026. 25 Aug. 14, 1963_
45, 636. 75 Aug. 19, 1963_
8, 057. 52 Aug. 23, 1963_
4, 000. 00 Aug. 28, 1963
3, 749. 95 Aug. 29, 1963
1, 739. 65 May 26, 1964__
196, 800. 00 Sept. 27, 1966379,000.00
Jan. 12, 1967.
15, 000. 00 Jan. 24,196710, 000. 00 March 1967.
40, 000. 00 Apr. 7, 1967
492, 000. 00 Feb. 21, 1968___
1, 000. 00 June 5, 1968

Name of
stock

Kaneb Pipeline Co_
do
do
_do_
Great Southwest Corp_
Tropical Gas Co
do
do
do
do
do_
do_
Continental Mortgage Investors.
First Bank & Trust Co. of
Boca Raton.
University National Bank of
Boca Raton.
do
Holiday International Tours__
National Homes Corp

Number
of shares

Cost of
investment

19, 000
3,000
633
5,000
10, 000
4, 100
1,315
200
1,700
400
2,000
285
10, 000
8, 112

$95, 082. 35
15, 000. 00
3, 165. 00
40, 000. 00
165, 000. 00
74, 637. 50
25, 012. 30
3, 950. 00
34,011.25
8, 057. 52
40, 075. 00
5, 751. 70
196, 800. 00
242, 174. 50

2,928

62, 640. 00

1,700
51, 000
200

31, 544. 50
25, 000. 00
2, 937. 50

TABLE

1.—Penphil loans from Chemical Bank1

Schedule of Penphil loans from
Chemical Bank 2
Date
of loan

Jan. 22,1968
June 24, 1968
June 25, 1968
Aug. 30, 1968
Oct. 4, 1968

Amount
of loan

$41, 549. 16
50, 000. 00
40, 000. 00
60, 000. 00
30, 000. 00

and stock

purchases—Continued

Schedule of Penphil stock purchas'es
Date of
purchase

Name of
stock

National Homes Corp.
June 6, 1968
June 27, 1968.__ Loan to Holiday by PenphiL
Sept. 10, 1968_._ First Bank & Trust Co. of
Boca Raton.

Number
of shares

Cost of
investment

4,800

$71, 433. 03
40, 000. 00
90, 750. 00

1,815

fcO

Total

1, 810, 209. 08

i All loans were made by the Chemical Bank New York Trust Co. at the prime rate.
2 Data on loans obtained from Chemical Bank New York Trust Co.




Total

3

1, 273, 022. 15

3 Total does not include Penphil's investments in short-term paper, Government
securities, or long-term debentures.

13
When questioned by staff investigators, Chamberlain said that
under normal conditions Chemical would make such loans at an
interest rate that was at least one point above the prime and that a
"decent" compensating balance would be required from Penphil. By
"decent" Chamberlain said he meant t h a t an amount equivalent to
about 20 percent of the outstanding balance of the loans would have
to have remained on deposit in a Penphil account in the bank. Penphil
did maintain a checking account at Chemical, but the amount on
deposit fluctuated markedly, and the average amount—about
$4,000—was far from 20 percent of the $500,000 to $800,000 outstanding balance that was usual on the Penphil loans. In fact, it was
less than one percent.
Chamberlain said that normal loan requirements were not applied
to the Penphil loans because of "other considerations which compensated the bank". These other considerations, according to Mr. Chamberlain, consisted of the following:
1. One of the bank's major accounts consisted of loan transactions
with the Penn Central—an arrangement which, among other things,
required maintenance of a compensating balance.
2. David Bevan was known to senior officers of Chemical. He was
so well known, in fact, that he has had a line of credit for personal
loans with the bank predating the formation of Penphil. The unpaid
balance on this account, bank sources said, reached a high point in
1967 when Bevan owed Chemical about $150,000. For the most part,
the loans were used for private stock investments. However, in one
instance, Chemical loaned Bevan $55,000 on an unsecured basis
after Bevan had produced satisfactory evidence that he was worth
$1 million. The money was used to purchase a condominium apartment in Boca Raton, Florida, from the Arvida Corporation, which
is now controlled by Penn Central. All of Bevan's personal loans from
Chemical were at the prime rate, a situation enjoyed by few individuals
in the nation, no matter how wealthy or powerful they are. In December 1970, the outstanding balance on Bevan's loans at Chemical was
$16,000.
3. Chamberlain had a longstanding professional relationship with
Charles Hodge based on bank transactions with Glore Forgan (now
F . I. duPont, Glore Forgan) and private loans made to Hodge and
his wife for stock investments and other purposes. The unpaid balances of Chemical Bank's loans to Hodge and his wife totaled almost
$950,000 in November 1968.
Chamberlain said that $350,000 to $400,000 was loaned to Hodge in
1970 so that he in turn could use these funds to shore up the crumbling
financial structure of Glore Forgan. Glore Forgan senior debentures
were assigned to secure this loan—which means that if Glore Forgan
had collapsed, Chemical security for this loan would have been worthless. (Chamberlain said that Chemical made 15 or 20 loans in 1970 to
other investment banking firms which had similar financial problems),
4. Professional business relationships also existed between Chemical
and other Penphil stockholders involved in the investment banking
field.
5. Chamberlain said that all the Penphil stockholders with whom he
was acquainted were "responsible people".




14
6. The Penphil loans, Chamberlain said, were "fully and properly
secured". Chamberlain said that by this he meant that stock purchased
with the loans to Penphil together with the income from these securities was pledged to secure the loans.
PenplnTs first investment consisted of the purchase of 22,633 shares
of Kaneb Pipe Line at a cost of $113,247, in July of 1962. Ninety
percent of the total cost, $102,000, was provided by Chemical in its
first loan to Penphil. This type of transaction, with Chemical providing
a maximum amount of money and Penphil providing a minimum
amount, typified transactions between the two throughout the history
of Penphil. The unpaid balance of the Penphil account reached its
highest point in June of 1968 when it totaled $1.2 million. That year
also marked the highest point reached in terms of the market value of
Penphil investments, $3.2 million.
As indicated above, the Penphil-Chemical relationship was established with remarkable ease, and from that time on the transactions
between the two were conducted without hesitation.
Generally, small blocks of Penphil stock, ranging from 100 to 300
shares, were sold to each of the existing stockholders twice a year, in
January and June. The proceeds would be applied against the accrued
interest on the Chemical loan, and the remainder was used to reduce
the principal. All dividends earned by the Penphil investments, and
the proceeds from the sale of stock held by Penphil in Great Southwest,
U.S. Freight Co. and National Homes were applied against the unpaid balance of the loans which in December of 1970 had been reduced to $280,000.^
Chamberlain said that from time to time he would meet with
Hodge, who would give Chamberlain instructions about receiving
and delivering stock in connection with Penphil investments. These
instructions would later be confirmed in writing from Thomas Bevan
in Philadelphia.
In this way, most of the Penphil shareholders were required to
invest only $16,500 of their own money as of December 1970. The
balance of the investment funds came from Chemical Bank loans,
dividends and capital gains from the sale of securities. As a result of
this arrangement and the appreciated value of Penphil investments,
the original Penphil shareholders each hold stock having a net value
of about $100,000—or a 600 percent return on their cash investment.
Each share of Penphil stock was valued at $35 in December 1970.
When questioned by staff investigators, Chamberlain said he was
not aware that Penphil held common investments with the Penn
Central in Tropical Gas, Kaneb Pipe Line, Continental Mortgage
and National Homes until press reports revealing this were published
during the summer of 1970. On further questioning, Chamberlain
said he was aware that Penphil sold its stock in the Great Southwest
Corporation in order to avoid a conflict of interest situation after
control of that company had been purchased by Penn Central. (This
transaction is detailed elsewhere in this report.) When asked whether
the sale of Great Southwest stock by Penphil had prompted him to
examine other Penphil investments to determine the possible existence
of other conflict of interest situations, Chamberlain replied it had not.
Indeed, Chamberlain said he would not have been concerned about the




15
Penphil situation even if he had known from the beginning that
Penphil held common investments with Penn Central in the four
companies noted above, "as long as all the cards were on the table."
Chamberlain said that Thomas Be van, in August of 1970, asked
him how much interest had accrued at that time on the unpaid balance
in the Penphil account and indicated that Penphil stockholders intended to liquidate the corporation. Nothing was heard from Thomas
Bevan during the ensuing two weeks, and at the end of that time
Chamberlain called Bevan to ask if there were instructions that he
should be following regarding the liquidation of Penphil assets.
He said that Bevan told him then that Penphil stockholders were
not going to sell out after all. Nevertheless, Chamberlain said he understood that Penphil shareholders intended to liquidate in the foreseeable
future.
His statements regarding Penphil were given to staff investigators on
December 21, 1970. At that time, Chamberlain said he was not aware
of a December 9, 1970, Penphil stockholders' meeting in Philadelphia,
when it was decided by an overwhelming vote to rescind a previous
decision to liquidate and to continue the corporation for an indefinite
time. Chamberlain indicated that under these circumstances Chemical's loan arrangements with Penphil might have to be re-examined
from the point of view of imposing additional requirements, such as
a compensating balance. By the same token, he also indicated that
continuation of the Penphil account under existing, dormant conditions, stemming from the fact that Penphil has made relatively few
investments during its entire history and none recently, would be less
than satisfactory to Chemical. "We can't let this thing drag on
forever this way," he asserted.
The reason for Chemical's changed attitude toward Penphil is
obvious. The Penn Central Transportation Co. had collapsed and so
had its ability to maintain a large compensating balance and to retire
the outstanding balance on its loans from Chemical. Therefore, the
overriding incentive to Chemical to carry the Penphil account under
what can only be regarded as privileged circumstances no longer existed.
COMMON

INVESTMENTS

OF

PENPHIL

AND PENN

CENTEAL

With the exception of the investments in the two Florida banks
and Holiday International Tours (HIT), all of the major investments
of Penphil have one important factor in common—Penn Central also
invested in the stock of these five companies at approximately the
same time as Penphil. Furthermore, PenphiPs investments in the two
Florida banks and H I T are directly related to Penn Central's investments in the Arvida Corporation and Executive Jet Aviation, Inc., as
detailed in other sections of this report.
The establishment of Penphil and the control of its investment
program can be primarily attributed to two men—David Bevan and
Charles Hodge. The Penn Central investments in the subject companies were controlled by David Bevan. At the same time, Charles
Hodge served as the investment advisor to Penn Central.
Table 2 which follows shows the common investments of Penphil
and Penn Central.




TABLE

2.—Common investments of Penpkil and Penn Central
Penphil

Number
of shares
acquired

Name of company

Kaneb Pipe Line Co
Tropical Gas Co., Inc
Continental Mortgage
Investors.
Great Southwest Corp
National Homes Corp

x

Number
of shares
acquired

30, 488
10, 000
5
30, 000

July 25, 1962-Feb. 7, 1963 _
Aug. 6, 1963-Sept. 5, 1963_.
May 26, 1964

6

July 18, 1963
June 5, 1968-June 6, 1968

3

10, 000
5, 000

3

Time period

122, 500
89, 400
112,500

Nov. 11, 1960-Dec. 3, 1968.
Feb. 26, 1960-Oct. 15, 1968.
Apr. 6, 1962-Dec. 31, 1969.

Time period

1
Penphil also holds warrants on 7,653 shares of Kaneb common stock.
2 Penn Central also holds warrants on 41,021 shares of Kaneb common stock.
3
Penphil's holdings in Tropical Gas (U.S. Freight Co.) and National Homes were
sold in the summer of 1970.




Penn Central

2

4
5

23, 902, 750
7
10, 000

Jan. 29, 1963-December 1969.
Sept. 13-17, 1968.

* Exchanged for 79,566 shares of U.S. Freight Co., as result of merger in October 1969.
6
Subsequently, on Jan. 15, 1970, there was a 2-for-l stock split,
e Sold its shares on Dec. 7,1965.
7 Sold 8,700 of these shares between May 13 and Sept. 24,1969.

o*

17
An analysis of the Penn Central holdings in the five companies
shown in table 2 indicates that, with the exception of its holdings in
Great Southwest, the investments were made primarily through the
Railroad's Contingent Compensation Fund and the Supplemental
Pension Plan. Both of these funds were under the direct control of
David Bevan.
The Contingent Compensation Fund consists of deferred compensation for officers of the Railroad and certain of its subsidiaries. The
Fund's holdings, which had a market value of about $11.5 million at
December 31, 1969, are considered to be assets of the Railroad.
The Supplemental Pension Plan represents pension rights belonging
to about 21,700 active and 15,200 retired employees of the Railroad
and 34 of its subsidiary companies. At December 31, 1969, the Plan's
holding had a book value of over $278 million and the market value of
the holdings totalled about $331 million. The funds in the plan are
not considered to be assets of the Railroad.
Presented in the following table is a breakdown of the Railroad's
holdings in the five companies under discussion:




TABLE 3.—Penn Central stockholdings in 5 companies in which Penphil invested

Name of company

Kaneb Pipe Line Co
Tropical Gas Co., Inc
Continental Mortgage Investors
National Homes Corp
Great Southwest Corp

Pension
plan
holdings

x

122, 500
89, 400

112,500
10, 000
23, 902, 750
4

3

Percentage of
total
holdings

80, 000
87, 400

Total
Penn Central
holdings

Contingent
compensation
fund
holdings

65
98

35, 500
2,000

29
2

105, 750

94

(3)
9,700
81,000

97

73, 900

1
In addition, Penn Central holds warrants on 41,021 additional shares of Kaneb common
stock, as follows: Pension plan, 32,143; contingent compensation fund, 4,286; and Buckeye
annuity plan, 4,592.
2
These shares are held by the Buckeye Pipe Line Co.'s annuity plan fund and contingent compensation fund.
3
Subsequently, on Jan. 15,1970, there was a 2-for-l stock split, raising the holdings of




Percentage of
total
holdings

Other
holdings

Percentage of
total
holdings

7,000
3

6, 750
2
300
5
2 3 , 747, 850

00

6
3
99

the pension plan to 211,500 and the "other holdings" to 13,500. In addition, on Feb. 24,
1970, the contingent compensation fund purchased 1,000 shares.
* Sold 8,700 of these shares between May 13,1969 and Sept. 24, 1969.
5
Shares held by the Pennsylvania Co., a wholly owned subsidiary of the Penn Central
Transportation Co.

19
I t can be seen from table 3 that with the exception of the investments in National Homes Corp. and Great Southwest Corp., the
majority of the funds used in the Penn Central's common investments
with Penphil came from the employees' Pension Plan.
Common Investments—Two
Classifications
An analysis of the five common investments of Penphil and Penn
Central shows that they can be classified into two separate groupings,
as follows:
1. Kaneb Pipe Line Co.; Tropical Gas Co., Inc.; and Great Southwest Corp.
2. Continental Mortgage Investors; and National Homes Corp.
The former grouping represents those companies that were interlocked with the Penn Central-Penphil-Glore Forgan combine. For
each of the three companies, the President or principal officer became
a member of Penphil. One or more Penn Central and Penphil members
became or were directors of the companies. The combined stockholdings
of Penphil, its members, Glore Forgan, its members, and Penn Central
in these companies made it possible for the Penphil-Penn CentralGlore Forgan combine to control each of these three companies. For all
three of these companies, Glore Forgan served as the investment
banker.
The second grouping represents a completely different picture.
There w^ere no interlocks between these companies and Penphil, Glore
Forgan and Penn Central. The combined stockholdings in these
companies by the Penphil-Penn Central-Glore Forgan combine w^ere
insufficient to allow the combine to have any significant control over
these two companies. For both of these companies, Hornblower &
Weeks-Hemphill, Noyes served as the investment banker.
PenphiPs total investment in the five common companies amounted
to $783,590. Of this amount, $512,420 was invested in the stocks of
Kaneb, Tropical and Great Southwest. This amount represented over
65 percent of PenphiPs total investment in these five companies.
PenphiPs investment in Continental Mortgage and National Homes
totalled $271,170, or less than 35 percent of PenphiPs total investment
in the five companies.
The Committee staff was informed by Charles Hodge that he
advised Penphil to invest in Kaneb, Tropical and Great Southwest.
He further stated that Lawrence Stevens of Hornblower & WeeksHemphill, Noyes, made the recommendations to Penphil regarding
the investments in Continental Mortgage Investors and National
Homes Corporation.
Through stockholdings and interlocks, Kaneb, Tropical and Great
Southwest were deeply intertwined with the Penphil-Penn CentralGlore Forgan complex—so deeply, in fact, that David Be van and
Charles Hodge could exercise control over their operations.
MYSTERY

OF

PENPHIL

During the course of the investigation of the Penn Central Transportation Company, it became apparent to the committee staff that
many, if not most, of the shareholders of Penphil did not participate
in its investment decisions. Indeed, many, if not most, of the shareholders were unaware of what investments Penphil had made until
55_559__71




4

20
after the fact. According to their statements, they paid little or no
attention to these investments.
A case in point is William Gerstnecker. Gerstnecker is one of
the original 16 members of Penphil and was Treasurer and a Vice
President of the Penn Central. During his discussion with staff
investigators, he described himself as "David Be van's assistant/'
Gerstnecker said that the original members of Penphil, for the most
part, were friends of David Be van and comprised the membership of
a fishing club, "The Silverfish", which used to take annual or semiannual fishing trips. Gerstnecker said he never went with the group
because he did not have the time to do so.
During the first half of 1962, Gerstnecker said, David Bevan told
him an investment club was being formed and asked if he (Gerstnecker) would like to join.
Bevan told him some of the group's members were "good investment people'' and that the club "would have good advice" in this
respect. Gerstnecker said he joined without hesitation.
Gerstnecker told staff investigators that he "was never consulted
prior to any of Penphil's investments, with the exception of Holiday
International Tours." l He stated that he knew about H I T because
he was at a meeting when this was discussed.
Other than the H I T investment, Gerstnecker disclaimed having
participated in any other Penphil investment decisions. The former
Penn Central Treasurer said he was unaware of (1) the loan arrangements Penphil had made with Chemical Bank, (2) the nature of the
Penphil-Florida bank investments, (3) Penphil's ability to control
certain of the companies it invested in, and (4) the reasons behind the
August 1970 decision to liquidate Penphil and the December 1970
decision to continue Penphil.
However, Gerstnecker said he was aware of David Bevan's intention
to turn Penphil into a substantial holding and operating company and
the fact that Penphil held common investments with Penn Central.
He said he was not concerned about the common holdings.
Robert Haslett, who also worked under David Bevan at the Penn
Central as Vice President-Investments, said that Bevan informed him
in 1962 that "a little investment club" was going to be formed "to
put some money to work and try and make some money," and he
accepted the invitation to join. Haslett said he looked on the periodic
Penphil stock purchases required of Penphil members as a "payroll
deduction" over the years and did not pay much attention either to the
$16,500 he ultimately invested in the company or to the investments
made by Penphil itself.
He told staff investigators that he saw nothing wrong in the fact
that Penphil held common investments with the Penn Central even
though he admitted the necessity of Penphil having to sell its shares
of Great Southwest to eliminate a conflict-of-interest situation after
the Penn Central purchased controlling interest in that company.
The sale, he added, did not prompt him to examine other common
investments of Penphil and the Penn Central from the point of view of
determining whether other possible conflict-of-interest situations
existed.
i Penphil's investment in H I T , which is summarized later in this report, was previously detailed in Part
II of the staff report—Case Study of a Penn Central Subsidiary: Executive Jet Aviation.




21
Like other Penphil shareholders questioned by staff investigators,
Haslett said he was unaware of PsnphiPs investments until after
they were made and knew nothing of the details of the company's
investments in H I T , the Florida banks or of the special features of
PenpmTs loan arrangements with the Chemical Bank. I t is diflEicult
to understand how he could make this profession of ignorance concerning the activities of Penphil in view of the fact that he was a
former Director, Vice President and Chairman of the Investment
Committee for Penphil.
The same lack of knowledge concerning the details of PenphiPs
investments was also expressed by Thomas Bevan, even though he
has been a Penphil officer since the founding of the company. Thomas
Bevan, however, admitted knowledge of his brother's intention to
turn Penphil into a conglomerate.
Similar responses were given to questions about Penphil by Thomas
Fleming, Brown Whatley and Herbert Fisher. As noted elsewhere in
this report, Fleming stated he was anxious to join Penphil because
he was impressed with what he considered to be the financial stature
of David Bevan and Charles Hodge. Whatley stated he joined Penphil
to cement his relationship with David Bevan, who was directing the
Penn Central's investment program. Fisher said he was invited to join
by Bevan and did so because it looked like an opportunity to make
some money. He said he paid no attention to Penphil because it
represented a relatively small investment for him and he had more
important matters with which he was concerned.
Documents obtained by the staff and statements made by Penphil
shareholders make it clear that all final decisions regarding PenpmTs
activities were made by David Bevan and Charles Hodge. I n effect,
the activities of Penphil remained a mystery to most of its membership, while control was exercised by these two men.
A part of the mystery of Penphil includes the handling of a transaction involving the sale of $750,000 worth of Kaneb Pipe Line Company debentures to the National Newark and Essex Bank of Newark,
New Jersey, in September of 1968. The $750,000 total included a
$500,000 Kaneb debenture note held by Penphil. Details of the transaction are contained in the following correspondence.
A letter dated September 5, 1968, from Thomas Bevan to Melville
P. Chamberlain, Vice President of Chemical Bank, states:
This is to confirm my telephone conversation in which I requested
you to forward to Donald Herterich, Vice President of Manufacturers
Hanover Trust Company, 40 Wall Street, New York City, the $500,000
Kaneb debenture which we pledged with you as security for the loan.
We are selling the $500,000 Debenture to the National Newark and
Essex Bank for which there will be a closing on September 10 at which
time we will request Mr. Herterich to forward to you $500,000 in reduction of our loan. We would appreciate it if you will deposit in our account
the additional amount of $16,423.62 representing interest on the Debenture which will be paid to us at the same time.
Mr. Herterich would appreciate receiving the Kaneb Debenture as
soon as possible so that he can combine it with another debenture which
is being sold to the same bank at that time.

A letter dated September 6, 1968, from Robert W. Loder, then
Assistant Vice President of the Penn Central Transportation Com-




22
pany, to John N . Page, Vice President and Senior Investment Officer
of the National Newark & Essex Bank, reads as follows:
Your bank has agreed to purchase from us on September 10, $750,000
principal amount of Kaneb Pipeline Company 6%% Subordinated Notes
dated December 19, 1967. These Notes are being sold to you at par
together with accrued interest at 6%% from March 18, 1968, to September 9, 1968, inclusive, amounting to $24,635.43.
The Notes are presently in possession of the Manufacturers Hanover
Trust Company, Transfer Agent, and are being reregistered in the name
of George & Co. [nominee name used by the National Newark & Essex
Bank] for delivery to you.
Will you please arrange to bank wire the sum of $516,423.62 to the
Chemical Bank New York Trust Company, (Attn Melville Chamberlain, Vice President), Church Street Post Office Station, for credit of
the account of Penphil, account number 066-106-397. The sum of
$258,211.81 should be bank wired to Girard Trust Bank, Broad and
Chestnut Streets, Philadelphia, Penns37lvania, for account of Mutual
Fire, Marine and Inland Insurance Company, account number 2 2-061-737.
For your information, I am attaching a copy of the Note Agreement
pertaining to the extension and renewal of the Note you are purchasing.
Your cooperation is very much appreciated.

Neither of the debentures involved in the above transaction was
owned by Penn Central. Yet the sale was handled by a Penn Central
employee who was not a member of Penphil, and the letter from
Loder to Page was written on official Penn Central stationery.
Loder, an assistant to Bevan at the time of the subject transaction,
told staff investigators that he did not remember the letter. Moreover,
he added that he knew nothing of the transaction or why he handled
the sale of a debenture owned by Penphil. He did acknowledge, however, after the letter was read to him by staff investigators, that he
did write the letter and that these were not Penn Central-owned
debentures.
KANEB PIPE LINE COMPANY

Penphil began investing in Kaneb in 1962, and continued purchasing
stock through February 1963. Penphil owns 30,488 shares of Kaneb
common stock. Penphil also holds warrants to purchase an additional
7,653 shares of Kaneb common stock.
In the summer of 1963, Herbert E. Fisher, Chairman of the Board of
Kaneb, became a stockholder in Penphil. Mr. Fisher owns 115,496
shares of Kaneb common stock. Mr. Fisher is also co-trustee of two
trusts for the benefit of his daughter. The trusts collectively own
24,835 shares of Kaneb common stock.
Mr. Fisher's feelings about being invited to join Penphil are expressed in the following letter:
SEPTEMBER 16,

1963.

To our Associates in the Penphil Co.:
First let me thank you for the opportunity of being associated with
such a fine group as represented by Penphil. I am sorry that Mr. Benjamin F. Sawin was unable to be present as he is the only one we have
not as yet met. We are, of course, personally acquainted with Fred
Billups and Angus Wynne.
As you will recall, at the New York meeting I promised to keep the
Penphil stockholders currently apprised of the status of Kaneb. In
order to bring you up to date I am transmitting attached the 1962 annual
report and the semiannual report ending June 30, 1963. Also, for the
information of our new associates we are enclosing a cop3r of our engineering firm's brochure which briefly outlines the services we perform. It




23
should be remembered that Kaneb Pipe Line is operated under a longterm management contract by Pipe Line Technologists, Inc. Exclusive
of full-time operating personnel, Kaneb officers and directors receive no
direct remuneration other than that covered by the management contract. The primary incentive to the officers and directors is their ownership in the company and nominal stock options.
Pipe Line Technologists is strictly a firm of professional engineers
which is in no way directly or indirectly connected with a construction
contractor, supplier, or manufacturer. The firm enjoys a worldwide
reputation and is presently negotiating for management operating
contracts which should have the effect of further reducing the staff
charges to Kaneb.
We would welcome an opportunity to visit with any of the Penphil
members whenever they are in Houston or the vicinity of Kaneb facilities.
Please do not hesitate to advise if we can be of any assistance to you at
any time.
We shall look forward to becoming better acquainted with each of
you personally through Penphil and our other joint ventures.
Sincerely yours,
HERB FISHER.

The Railroad, under David Bevan's supervision, began purchasing
Kaneb common stock in November 1960. By December 1968, the
Railroad had acquired 122,500 shares of Kaneb common stock. In
addition, the Railroad holds warrants on an additional 41,021 shares
of Kaneb common stock.
In 1963, David Bevan became a director of Kaneb. Mr. Be van is the
beneficial owner of 3,044 shares of Kaneb common stock.
Although Glore Forgan had no Board members on Kaneb, it was
directly tied in with the company. In addition to being the investment
banker for Kaneb, Glore Forgan and its members, at March 10, 1965,
held beneficially almost 107,000 shares of Kaneb common stock.
Kaneb also had a common director with Tropical Gas Co., Inc.—
Mr. Ralph W. Halsey, Jr. A Director of Kaneb since 1958, he was also a
Director of Tropical since 1958.
By 1969, the combined stockholdings of Penphil, its members, and
Penn Central amounted to almost 22 percent of the total outstanding
common stock of Kaneb. (This total does not include any holdings by
Glore Forgan, its members, or the trust holdings of Mr. Fisher's
daughter.) The 22 percent stockholding in Kaneb was broken down
as shown in the following table:




TABLE

Total Kaneb common
shares outstanding

1,259,053

4.—Penphil group stockholdings in Kaneb Pipe Line Co.

Holdings of
Penphil, its
members, and
Penn Central
1234

271,528

21.56

i Does not include any stockholdings of Glore Forgan or its members. Glore Forgan
and its members held almost 107,000 shares at Mar. 10,1965. Comparable information was
not available for 1969.
2
Does not include warrants held by the Penn Central for an additional 41,021 shares
of Kaneb common stock.




Breakdown of Penphil, its members, and Penn
Central holdings

Percent holdings
of Penphil, its
members, and
Penn Central

Penn
Central
3

122, 500

Penphil
3

30,488

Herbert
Fisher
4

David
Bevan

115,496

3,044

Total
holdings

271,528

3 Does not include warrants held by Penphil for an additional 7,653 shares of Kaneb
common stock.
4
In addition, Mr. Fisher is the co-trustee of 2 trusts for the benefit of his daughter. The
trusts collectively own 24,835 shares of Kaneb common stock.

25
The combined stockholdings of just Penphil, Penn Central and
David Bevan, exclusive of the warrants held by Penphil and Penn
Central, amounted to over 12 percent in 1969, as follows:
Total Kaneb common
shares outstanding

Shares held by Penphil,
Penn Central and
Dave Bevan

Percent of total
outstanding

1,259,053

156,032

12.39

The above facts demonstrate quite vividly that David Bevan was
attempting to maneuver himself and Penphil into the same control
position over Kaneb that was achieved in the cases of Tropical Gas,
Great Southwest, Holiday International Tours, and the two Florida
banks, as described in other sections of this report.
CONTINENTAL MORTGAGE INVESTORS AND NATIONAL HOMES
CORPORATION

The Penphil and Penn Central investments in Continental Mortgage
Investors and National Homes Corporation—the two common investments for which Glore Forgan was not the investment banker—
present a completely different picture from the Kaneb, Tropical and
Great Southwest investments.
No principal officer or director of Continental Mortgage or National
Homes became a member of Penphil. No Penphil member went on
the Board of Continental Mortgage or National Homes. No member
of Glore Forgan served on the Boards of these two companies.
At no time did the combined stockholdings of Penphil and Penn
Central rise above 2.14 percent of the outstanding common stock of
either one of these two companies. The following table shows the
holdings of Penphil and Penn Central as compared to the outstanding
shares of these two companies.




TABLE

5.—Penphil group stockholdings in nonintedocked companies
Total shares
outstanding

Company

Total Penphil
and Penn
Central holdings

Percentage of
total shares
outstanding

Breakdown of holdings
Penphil

Penn Central

,

Continental Mortgage Investors
National Homes Corp
i Subsequently, on Jan. 15, 1970, there was a 2-for-l stock split.
2 Penphil disposed of this investment in the summer of 1970.




fcO

6, 631, 932
4,697,264

* 142, 500
15,000

2. 14
.31

l
2

30, 000
5, 000

s Sold 8,700 of these shares between May 13,1969, and Sept. 24,1969.

l
3

112, 500
10, 000

27
The attitude of the Penphil hierarchy towards these two investments
is best summed up in a letter from Charles Hodge to David Bevan
concerning the National Homes investment, presented below:
Dear Dave: With reference to your letter of June 5, 1968 and memorandum from Ben [Sawin], I concur completely with Ben's recommendation and you have herewith my affirmative vote.
I was notified after the fact this morning that Penphil has bought
5,000 shares of National Homes. Larry [Stevens] called me and explained
it was an oversight that I was not notified, and this oversight is understandable and I am certainly not put out. However, I must go on record,
while this will be a popular and fast moving stock, I do not agree with
the fundamental purpose nor do I agree with the management of the
Price brothers who have not demonstrated any ability in this field. I am
confident that stockmarketwise we will probably make some money in it,
but would like to go on record that this is not one to hold blindly.
See you soon.
Sincerely,
CHARLES J. HODGE,

Chairman of Executive Committee.
PENPHIL INVESTMENT IN GREAT SOUTHWEST CORPORATION

Penphil's involvement with the Great Southwest Corporation (GSC)
differs from the other common investments of Penphil and Penn
Central in that Penn Central eventually acquired direct control of
GSC. This control was established during the time period that Penphil
held its investment in GSC.
A description of GSC and the nature of Penphil's and Penn Central's
involvement with GSC follows.
Great Southwest Corporation
Great Southwest Corporation was incorporated in Texas on October
2, 1959, as the successor to two Delaware corporations incorporated
in 1956. Since launching its initial enterprise, a 2,400-acre industrial
park in Texas in 1956, GSC has become one of the nation's largest
land developers.
In 1969, the California-based Macco Corporation—a 100%-owned
subsidiary of the Penn Central Company—was merged into GSC. In
addition to its real estate activities in Texas and California, GSC
constructed and now operates, as the general partner in two limited
partnerships, large amusement parks in Texas and Georgia. A third
amusement park in St. Louis is currently under construction.
. In recent years, GSC has entered the mobile home sales and
manufacturing field by acquiring the nation's second largest independent manufacturer of mobile homes. GSC has also acquired one of
the largest privately owned multi-family home building firms in the
nation. In addition, GSC recently acquired 50.2 percent interest
in a Dallas-based firm that manufactures computer hardware.
Penphil and Penn Central Purchase GSC Stock
On July 18, 1963, the Penphil Company purchased 10,000 shares of
GSC common stock at $16.50 a share for a total investment of
$165,000. On the same date, Penn Central purchased 4,000 shares of

55-559—71




5

28
GSC common stock at the same price as that paid by Penphil. This
increased the Railroad's holdings of GSC stock at that time to 5,200
shares—the initial purchase of 1,200 shares was made in January
1963 at a price of $18.25 per share.
Penn Central continued to acquire GSC common stock and by July
1964 had acquired direct majority control of the Corporation. During
this period of acquisition of GSC stock by Penn Central, Penphil
maintained its interest in GSC. I t was not until December 7, 1965,
approximately 17 months after Penn Central acquired direct control
of GSC and almost three years after Penn Central's initial investment
in GSC, that Penphil sold its 10,000 shares of GSC stock.
Penphil Involvement with GSC
During the period of time it held its investment in GSC common
stock, Penphil had numerous tie-ins with GSC, Penn Central and
Glore Forgan, as described below:
1. Angus G. Wynne, Jr., a principal stockholder, director and officer
of GSC was a principal stockholder in Penphil. Subsequently Mr.
Wynne became a director of Arvida Corporation, another real estate
development company controlled by Penn Central.
2. According to Thomas Be van, PenphiFs investment in GSC was
made on the basis of recommendations by Hodge, David Be van, and
Haslett (Bevan's assistant at Penn Central), among others. Penn
CentraFs purchases of GSC stock were made by David Be van on the
basis of his and Hodge's recommendations.
3. Charles Hodge had been affiliated with GSC since its inception
and had a considerable personal investment in the firm. (His direct
personal investment totalled about 38,000 shares as of June 12, 1970.)
In testifying before the CAB in November 1966, Hodge stated with
respect to GSC as follows:
I have (been) in that company since it started, and they asked me to
find a good partner, owner, and that was the second (company) that the
Pennsylvania Railroad acquired.
Q. And I gather through your association with Great Southwest, you
personally were involved in that acquisition?
A. Yes, I was. I was on the board.

4. In addition to Hodge's personal involvement, his company—
Glore Forgan—served a dual role throughout the investment period.
Glore Forgan served as the investment adviser to Penn Central and,
at the same time, served as the investment banker for GSC. PenpmTs
purchase and sale of GSC common stock was made through Glore
Forgan. Almost all of Penn Central's purchases were made through
Glore Forgan.
5. Glore Forgan and several of its present and former officers and/or
directors held substantial financial interests in GSC at June 12, 1970,
as indicated below. The exact date on which these shares were acquired
was not available. However, a substantial portion of these shares,
according to the minutes of a December 6, 1963, GSC Board of
Director's meeting, were acquired in 1963.




29
Shares of common stock held at June 12, 1970
Glore Forgan, Wm. R. Staats, Inc
Charles J. Hodge
J. Russell Forgan
Maurice H. Stans
Richard H . Millar
John F . Fennelly
Gerald T. Hodge
Other officers and directors

62, 000
38, 000
38, 000
38, 000
38, 000
37, 400
10, 500
162, 700

Total shares
424, 600
6. Several members of Penphil, as detailed below, also held financial
interests in GSC at June 12, 1970. I n most instances, information
was not available as to when these shares were acquired.
Shares of common stock held at June 12, 1970
Angus G. Wynne, Jr. 1
Warren H . Bodman
Thomas R. Bevan
William R. Gerstnecker 2
Samuel A. Breene
Vincent G. Kling

i

Total shares

326, 300
2,000
225
1, 000
100
2, 500
332, 125

1

Mr. Wynne's holdings apparently were acquired when GSC was first incorporated.
2 Mr. Gerstnecker has stated that his shares were acquired in 1970.

7. At the time of the initial Penphil and Penn Central purchases of
GSC common stock, Charles Hodge and Angus Wynne, Jr., were
members of the GSC Board of Directors. Both individuals were also
principal officers of GSC at that time.
Once Penn Central acquired control of GSC in July 1964, David
Bevan and William Gerstnecker became members of GSC's Board of
Directors. Stuart Saunders, Chairman of the Board of Penn Central,
also became a member of GSC's Board of Directors at the same time.
8. At the time Penn Central acquired control of GSC, the GSC
Executive Committee consisted of seven members, including Charles
Hodge and Angus Wynne, Jr. This was immediately reduced to five
members, with Bevan and Saunders joining Hodge and Wynne on the
Committee. The Executive Committee was reduced to four members in
early 1965. The four members were all associated with Penn Central
and/or Penphil—Bevan, Hodge, Wynne, and Saunders.
Once the Executive Committee became dominated by the Penn
Central-Penphil group, it assumed a much greater role in the operations of GSC. At the same time, the role played by the Board of Directors of GSC decreased substantially. These changes in the roles of
the Executive Committee and the Board of Directors are dramatically
reflected in the minutes of the GSC Board and Executive Committee
meetings.




30
Penphil Sells Its OSG Stock
I n December 1965, seventeen months after Penn Central acquired
control of GSC, Penphil sold its 10,000 shares of GSC stock. The sale
was made through Glore Forgan. On the same date, Penn Central
purchased 10,100 shares of GSC stock. The purchase was also made
through Glore Forgan. Mr. Haslett informed staff investigators t h a t
the shares purchased by Penn Central included the Penphil stock.
Penphil sold its stock for $37.75 per share, for a total of $377,500.
Penn Central purchased its shares on that date for $38.18 per share.
Penphil realized a profit of $212,500 on its GSC stock transactions,
as follows:
Total proceeds from sale
$377, 500
Less: Cost of stock
165,000
Profit on Sale of Stock

$212, 500

Conjlicts-of-Interest?
The Penphil-Penn Central-Glore Forgan involvement with GSC
raises very serious questions concerning real and potential conflicts-ofinterest. The relationships that existed among Penphil, Glore Forgan,
Penn Central and GSC afforded the members of Penphil and Glore
Forgan the following opportunities:
1. Access to insider information through the interlocks that existed
on the Board of Directors and the Executive Committee of GSC.
2. Control over the activities of GSC through the interlocks on the
Board, the Executive Committee and the officer positions held by
Wynne and Hodge.
3. The maintenance of the market for GSC stock by virtue of the
vast amount of Penn Central financial resources available to David
Bevan for purchasing GSC stock.
4. A ready buyer—Penn Central—in the event they wished to
dispose of their GSC holdings.
David Bevan'}s Position
I n a July 21, 1970, letter regarding the question of conflict-ofinterest, David Bevan denied the existence of any such conflict.
At the time we bought a small amount of Great Southwest stock for
our [Penn Central] Contingent Compensation Fund, Penphil bought
another odd lot offering with the same idea in mind that it was an
interesting speculation.
At that point, control of Great Southwest was tightly centered in the
Rockefeller and Wynne families. No one had any possible way of knowing
that at a later date a rift would occur in the Wynne family. However, this
occurred in the following year and as a result Toddy Wynne, Angus
Wynne's uncle, thereupon expressed a desire to dispose of the family's
interest in Great Southwest. Since the understanding between the
Rockefellers and the Wynnes was that they would act in concert, control
of the company became available and it was offered to us through Glore
Forgan and, of course, as you know we purchased controlling interest.
A few months later I expressed a desire that Penphil sell its Great
Southwest stock so that we would be sure to avoid any future possible
conflict of interest. My wishes were respected and the stock was sold at a
price of $38. All members of Penphil made a sacrifice in this connection
as the price of $38 compares with even today's very low price of approximately $60 a share since the stock was later split 10 for 1. Actually at its
highest the stock sold at $430 a share which was just a little over a year
ago.




31
While Mr. Bevan makes his denial very emphatic, he fails to point
out several pertinent facts.
1. The "few months later" was actually 17 months. I t took Mr.
Bevan that long to recognize the existence of a possible conflict of
interest?
2. Mr. Bevan states that the members of Penphil "made a sacrifice"
in selling the stock in light of the subsequent increase in the value
of the stock. Mr. Bevan fails to explain how he could foresee the
subsequent rise in the stock's value at the time Penphil sold. Also, it
should be noted that if Penphil had held on to its stock, its value
today would be considerably less than $38 a share.
3. The fact remains that the price obtained by Penphil for its
stock—$377,500—represented a profit of $212,500. In percentage
terms, Penphil investors realized about a 130 percent profit on their
initial investment of $165,000, in a time span of less than 29 months.
4. Penphil acquired its stock in July 1963, at a price of $16.50 per
share. From that time until Perm Central acquired control of GSC
in July 1964, the per share price of GSC stock never rose above $24.
For about a year thereafter, while the Penphil ownership of GSC
stock clearly created a conflict of interest, the price per share of GSC
stock hovered around $19-$22. At no time during this one-year
period did Mr. Bevan mention a possible conflict of interest and
recommend selling PenphiFs shares of GSCi
Beginning in August 1965, however, the price per share of GSC
stock began to rise dramatically. By December 1965—less than 5
months later—GSC stock was selling for over $38 a share, a 73 percent
increase in value. I t was at this point that Mr. Bevan recognized the
possible conflict of interest that resulted in Penphil selling its shares for
a 130 percent profit.
5. The price per share obtained by Penphil in December 1965—
$38—was 14 points higher than the previous high price of GSC stock
since its incorporation through December 31, 1964; only 1J^ points
lower than GSC's high price for 1965; only iy2 points lower than
GSC's high price for 1966; and only 7 points lower than GSC's high
price for 1967.
I t was not until 1968 that the price per share of GSC stock showed
any significant increase over what Penphil received for its shares in
December 1965. Accordingly, Penphil would have had to hold its
stock for at least two more years before it could have realized any
appreciable increase over the price it received in December 1965.
6. As detailed above, the Penphil sale of stock in December 1965
was very advantageous to Penphil stockholders. By waiting seventeen
months to determine that a potential conflict of interest existed, David
Bevan was able to obtain a very favorable price for PenphiPs shares
of GSC.
6SG Epilogue
After acquiring control of GSC in July 1964, Penn Central continued
to acquire GSC stock. By December 1969, Penn Central had acquired
over 90% control of GSC for a total investment of almost $92 million,
an investment that still exists today.
In January 1971, GSC announced that it had written down its
net worth from $157 million—its book value as of December 31,
1969—to a current value of $50 million. This represented a more than
two-thirds reduction in the net worth of GSC.



32
In light of the above, PenphiFs sale of GSC stock in December 1965
appears even more lucrative. Had David Bevan exercised the same
business acumen on behalf of the Penn Central regarding its investment in GSC, Penn Central would not find itself in its current position
of holding a $92 million investment in a $50 million corporation.
TROPICAL GAS CO., INC.

Between September 1, 1963, and September 29, 1963, Penphil
purchased a total of 10,000 shares of Tropical Gas stock at a total
cost of $191,495. The snares were subsequently exchanged for 8,900
shares of U.S. Freight Company stock when Tropical merged with
U.S. Freight in October 1969.
Starting on February 26, 1960, and ending October 15, 1968, the
Penn Central purchased a net total of 89,400 shares of Tropical at
a total cost of $2,239,441. These shares were exchanged for 79,566
shares of U.S. Freight Co. stock following the merger in October 1969.
As of October 15, 1968, the combined holdings of Tropical stock by
Penphil and Penn Central had reached a total of 99,400 shares at a
ime when there were about 1.1 million shares of Tropical stock outstanding. Thus, Penphil and Penn Central collectively held almost 9
percent of the outstanding shares of Tropical Gas. The following
paragraphs will make it clear, however, that the influence Penphil
could muster over Tropical far exceeded the power Penphil could
exert based strictly on the substantial combined stockholdings.
Both Penphil and the Penn Central were acting on the advice of
Charles Hodge when the Tropical investments were made. That
Hodge w^as well acquainted with Tropical is obvious from the fact
t h a t he and a former Glore Forgan partner, Alfonso Manero, have
been directors of Tropical since 1954. Glore Forgan was the investment
banker for Tropical and the investment advisor to Penn Central. In
addition, David Bevan became a member of the Tropical board in
1964, the year following PenphiPs final purchase of Tropical stock.
By early 1969, the membership of TropicaPs Board of Directors
and the stockholdings of those individuals in the company were as
follows:
1. Fred H. Billups, (now deceased), Chairman of the Board,
President and Chairman of the Executive Committee of Tropical;
President and Director of Subsidiaries of Tropical; 51,610 shares.
2. Harry Hood Bassett, Chairman of the Board of the First National
Bank of Miami; Chairman of the Board of First National Bank of
Palm Beach; 6,000 shares.
3. David C. Bevan, Chairman of the Finance Committee and
Director, Penn Central Transportation Company; 160 shares.
4. Edward F. Clark, Jr., partner in the law firm of Carter, Ledyard
and Milburn; Secretary of Tropical and Director and Secretary of
Subsidiaries of Tropical; 51 shares.
5. James E. Dingman, former Vice Chairman of American Telephone and Telegraph Company; Director of Communications Satellite Corporation, Triangle Industries, Inc., Gulton Industries and
other companies (no stock).
6. Ralph W. Halsey, Jr., partner Halsey Associates, an investment
advisory company; previously Associate Treasurer of Yale University;
10,800 shares.



33
7. Charles J. Hodge, Chairman of the Executive Committee and a
Director of the investment banking firm of Glore Forgan, Wm. R.
Staats, Inc., and partner of its predecessor, Glore, Forgan & Co;
Vice President and Chairman of the Executive Committee of Tropical
and Director of subsidiaries of Tropical; 9,544 shares.
8. Alfonso Manero, retired Vice President of Glore Forgan, Wm. R.
Staats, and partner of its predecessor, Glore Forgan & Co.; 3,491
shares.
9. Hobart C. Ramsey, former Board Chairman of Worthington
Corp.; Director of Armstrong Cork Co. and Triangle Industries
Ramsey is also a former Glore Forgan vice president; 6,100 shares.
10. John Hagel, Jr., Executive Vice President of Tropical since
November 1966; for more than four years prior thereto, general
manager of Mobil Oil Caribe, Inc., San Juan, Puerto Rico; 4,196
shares.
Of the ten persons on the Tropical board in early 1969 (there was
one vacancy), five—Billups, Bevan, Hodge, Manero and Ramsey—
were Penphil shareholders. In addition, these five individuals comprised the complete membership of the Executive Committee of
Tropical.
Tropical also had borrowed a total of $2.5 million from Harry Hood
Bassett's bank, the First National Bank of Miami, and Tropical
funds were deposited in that bank, which was the custodian of the
company's stock purchase plan. As discussed later in this part of the
staff report, First National of Miami had made a number of construction loans to Arvida, which is controlled by the Penn Central, had
loaned the Pennsylvania Company $3 million to aid it in purchasing
Arvida stock, and had loaned the Penn Central $1 million to cover
commercial paper. Thus, the willingness of Bassett and First National
to assist the leadership of the Penn Central, which was the leadership
of Penphil, is well illustrated.
All of this boils down to the fact that from the time Bevan joined
Tropical's board, Penphil was in a position to control Tropical through
mutual alliances existing between six of the ten board members and
through the combined private stockholdings of the six, together with
the stockholdings of Penphil and Penn Central. These combined
holdings, in early 1969, totaled 176,305 shares of Tropical stock and
constituted 15.74 percent of the outstanding shares of Tropical
common stock.
In addition, Tropical had a director interlock with Kaneb Pipe Line
Company—Ralph W. Halsey, Jr., who was a director of Tropical
since 1958 and held 10,800 shares of Tropical stock, and was also a
director of Kaneb since 1958.
Of Penn Central's total Tropical stockholdings of 89,400 shares,
35,400 were purchased between September 20, 1968, and October 15,
1968, at a cost of $1,016,374. I n effect, Penn Central increased its
Tropical holdings by almost 40 percent in one 25-day period.
In the process, the price per share of Tropical stock was forced up
nearly 20 percent, from $27.32 to $32.47 a share during this same
25-day period.
The purchase of Tropical stock during this period should be viewed
against the following facts:
1. Penphil was in a position to control Tropical.




34
2. Between March of 1967 and September of 1968, TropicaPs investment banker, Glore Forgan, prepared studies and proposals for
financing Tropical's growth and expansion. On July 17, 1968, and on
September 25, 1968, TropicaPs board considered a specific plan for
equity financing and authorized filing a registration statement with the
Securities and Exchange Commission (SEC) for the sale of 230,000
shares of common stock.
3. Both Beva.L and Hodge, as members of TropicaPs board of directors and its executive committee, were aware of these studies and the
decision to sell additional stock.
4. On October 2, 1968, Mapco, formerly the Mid America Pipeline
Company of Tulsa, Oklahoma, announced that it would make a tender
offer for all shares of Tropical to effect a merger with Tropical in which
Mapco would be the surviving corporation.
5. Between October 3, 1968, and October 15, 1968, Penn Central
purchased 9,800 shares of Tropical at a cost of $316,854.
6. On October 15, 1968, the date of the last Penn Central purchase
of Tropical stock, Tropical publicly announced that it had filed its
registration statement regarding the sale of the 230,000 shares of
common stock with the SEC.
These dates comprise some of the milestones in what developed
into a bitterly fought, prolonged and ultimately successful effort on
TropicaPs part to prevent a takeover by Mapco. During the course of
the proceedings, a law suit was filed against Tropical by Mapco, and
Tropical, in order to avoid presenting Mapco with the opportunity
for strengthening its Tropical holdings beyond the 301,000 shares it
had already acquired, withdrew the proposed 230,000 share stock issue
and instead made a private sale of 122,000 shares to the Hillman Land
Company of Pittsburgh, Pennsylvania, on January 9, 1969. The stock
cost Hillman $3.7 million. The sale was arranged by Hodge, with the
understanding that Hillman was making the purchase for investment
purposes and did not intend to resell the stock. The purchase agreement with Hillman provided Hillman "piggyback" rights to join in
any registered offering of TropicaPs securities which Tropical might
make, in each case without cost to Hillman except for any underwriting discounts or commissions involved. In October 1969, Tropical
merged with and became a wholly-owned subsidiary of U.S. Freight
Company of New York, and Mapco withdrew its law suit.
The paramount question arising from these transactions as far as
Penn Central is concerned is why the Railroad, beginning on September 20, 1968, embarked on a campaign to purchase large amounts of
Tropical stock when the chief financial officer and the chief investment advisor of Penn Central, namely Bevan and Hodge, knew well
beforehand that Tropical would be making a large capital stock
offering shortly thereafter which would, at least initially, dilute the
earnings and the voting strength of all previous shares outstanding,
including stock already held by Penn Central itself.
This same question was raised by investigators employed by the
Penn Central Board of Directors early in 1970 to examine the validity
of complaints raised by a stockholder, George J. Franks of Miami,
as to whether the membership and activities of Penphil placed David
Bevan in a conflict-of-interest position. Robert Hasiett, then Penn
Central Vice President of Investments, in replying to a query from
the railroad investigators on July 28, 1970, wrote:



35
T h e New York Central Pension F u n d was merged into t h e P e n n
Central Pension Fund in M a y 1968, enlarging t h e funds b y over $130,000,000. I n view of the fact t h a t Tropical was a major holding prior to t h e
merger of the two funds, we decided to increase our c o m m i t m e n t when
stock became available with the idea of bringing t h e t o t a l to approxim a t e l y 100,000 shares. * * *
* * * Tropical was usually a difficult stock to purchase. * * *
Between September 20, 1968, and October 15, 1968, we purchased
t h r o u g h Glore Forgan 35,400 shares. * * *

Penn Central's largest single day purchase of Tropical stock was
18,000 shares made on September 20, 1968. Haslett told staff investigators that he received a telephone call from the Glore Forgan offices
in New York on that day informing him of the availability of this
stock. With Haslett's authorization, Glore Forgan purchased the
shares.
During the period that Penn Central purchased the 35,400 shares of
Tropical, on October 2, specifically, Mapco, Inc., announced plans to
acquire Tropical Gas through an exchange offer of nine-tenths of a
share of Mapco for each share of Tropical. At that time Mapco was
selling at 37 per share and Tropical was selling at 32 per share.
Mr. Haslett further stated in his letter:
Our last purchase of stock was on t h e 15th of October. T h e following
d a y the company officially filed a Registration S t a t e m e n t for t h e sale
of 230,000 additional shares of common stock. This was t h e first knowledge I had of a n y proposed financing, and, as a result, no further purchases were made.

Haslett was saying in effect that Bevan and Hodge revealed nothing
to him of the pending sale of 230,000 shares of Tropical prior to the
filing of the registration statement by Tropical. Evidence that Hodge
was well aware of the proposed sale is contained in a letter dated
August 16, 1968, from Billups to John Hagel, Jr., an Executive Vice
President of Tropical. The letter was written 25 days before Penn
Central began picking up the 35,400 shares of Tropical stock.
It reads in part:
As 3^011 already knew * * * we planned on and have alread.y begun
a company-wide audit through Price W a t e r house as of J u l y 31, 1968.
I m m e d i a t e action in this regard was necessary because of t h e s t r o n g
recommendation of Jack Harned [of Glore Forgan] with t h e concurrence
of Charlie Hodge, t h a t the issue of t h e stock to t h e public be m a d e t h e
earliest date possible in order to t a k e a d v a n t a g e of t h e present general
m a r k e t which they have reasons to believe might decline further. This
audit is being undertaken in t h e most expeditious m a n n e r possible. * * *

The foregoing material makes the following apparent.
Penn Central, beginning on September 20, 1968, began purchasing
large amounts of Tropical stock in the market, despite the fact that
Bevan and Hodge knew that the earning power and, therefore, the
value of these shares would be diluted with the sale of Tropical's new
stock issue of 230,000 shares—indeed, despite their knowledge that
the value of all existing Tropical shares would be diluted with the
sale of the new stock. The same situation would apply to the voting
power of all existing stockholders unless the Penn Central acted
beforehand to increase its holdings as a buffer against the broadened
stockholder base resulting from the sale of the new issue. In other
words, while all other existing stockholders would tend to lose strength
in Tropical, Penn Central's position would remain relatively unchanged
and might be materially enhanced because of the large blocks of



36
stock it was purchasing in the period just before the proposed new
stock issue wTas filed with the SEC.
I t was to Penphil's advantage not to purchase stock during this
period because Bevan and Hodge knew the value of all stock would
go down. By the same token, it was to Penphil's advantage to let
Penn Central take the loss, knowing that it (Penphil) could maintain
its control position over Tropical through Penn Central's strengthened
voting power.
When questioned by staff investigators, Haslett was unable to
give a clear-cut answer when he was asked why the Penn Central
waited 173 days after the merger of the New York Central and the
Pennsylvania Railroad pension funds before purchasing large blocks
of Tropical stock.
"Tropical was a very lightly traded stock", Haslett said. "Maybe
we just didn't get around to it before then. Anyway, we didn't want
to have to buy the stock in small amounts." This last was a reference
to the purchase of 18,000 shares of Tropical on September 20, 1968,
the day the Penn Central began its campaign to enlarge its Tropical
holdings to 100,000 shares. However, a document tracing the history
of Penn Central's Tropical purchases shows 15 instances both before and
after September 20, 1968, when the railroad bought small blocs of
Tropical stock ranging from 83 to 3,000 shares.
Haslett said that he did not know the identity of the owner or owners
of the 18,000 shares that Penn Central purchased in one day, an
unusual transaction for Tropical stock, inasmuch as monthly trading
ranged between 10,000 and 25,000 shares from M a y 1968 to August
1968. He added that he did not make any effort to find out who had
owned the stock.
"Normally," Haslett added, "Dave Bevan was aware of Penn
Central's Tropical stock purchases, but I'm not sure if he was in this
instance [the purchases made between September 20, 1968, to October
15, 1968]."
When asked whether he thought Bevan and/or Hodge should have
informed him about the pending sale of 230,000 share of additional
stock by Tropical, Haslett replied, "Would that not be inside information?" Haslett was then asked whether he thought Bevan's responsibility to protect the interests of the Penn Central was greater than
his responsibility to Tropical. " I don't know which one he had a responsibility to first. 1 just can't answer that," Haslett told staff
investigators.
There is another aspect of the Tropical-Penn Central stock situation
which raises questions concerning the propriety of Penn Central's
purchases of Tropical stock in the fall of 1968. The following information was developed after staff investigators had interviewed George F .
Bennett, President, State Street Investment Corp., Boston: Allen
Chandler, a petroleum analyst for the State Street Research and
Management Corporation, Boston (an affiliate of the State Street
Investment Corp.); Robert E. Thomas, president of Mapco, Inc.,
of Tulsa, Oklahoma; and Herbert E. Fisher, Chairman of the Board
of the Kaneb Pipe Line Company and a Penphil shareholder. (Penphil holds 30,488 shares of Kaneb and the Penn Central holds 122,500
shares of Kaneb.)
During the late winter or early spring of 1968, Chandler said he
contacted Thomas and told him there was "an excellent acquisition



37
opportunity for Mapco." Chandler said he knew of three institutional
investors which held Tropical stock and were "disenchanted" with
Tropical's growth and management. The three institutions were the
State Street Investment Corporation, Harvard College and Yale
College. Together they held 301,000 shares of Tropical stock. I n
addition, State Street Investment Corp. held 135,900 shares of Mapco
stock.
Thomas and Chandler said that from time to time, beginning in
the late winter or early spring of 1968, Thomas discussed the possibility of exchanging Mapco stock for the Tropical shares held by the
three institutional investors as part of Thomas' effort to effect a
merger of Tropical and Mapco, with Mapco being the surviving
corporation. Chandler told staff investigators that during this period,
a Tropical director (identified by Bennett as Joseph J. Snyder, Vice
President and Treasurer of the Massachusetts Institute of Technology)
invited Billups, President of Tropical, to come to Boston to meet
informally with representatives of the three institutional investors.
The meeting was held May 29, 1968, in the Ritz Hotel in Boston,
Chandler said. Chandler recalled that the discussion with Billups
centered on plans for the operation and future growth of Tropical
and that Thomas' activities to obtain Tropical stock as part of his
merger effort was not mentioned during the meeting. At the time,
Chandler said, the three institutional investors were dissatisfied with
Billups' leadership of Tropical because they thought the growth of
its s.tock was too slow, management was too conservative and Billups
was running the corporation "like it was his personal empire." Billups'
income from Tropical, amounting to $108,000 in 1968, retirement
benefits of $50,000 a year, plus survivors benefits of $300,000 in the
event of his death, figured in the dissatisfaction of the three institutional investors, who thought these were excessive sums for such a
relatively small corporation, Chandler said.
On October 2, 1968, Mapco issued a press release announcing that:
A tender offer for all the shares of Tropical Gas Company, Inc., is to
be made by Mapco, Inc., as soon as the necessary registration statement
can be filed and become effective. Mapco will offer nine-tenths of a share
of Mapco common in exchange for each Tropical share now outstanding.
A ruling will be requested from the Treasury Department and the exchange is expected to be tax free. Mapco has commitments to accept such
an offer from the holders of 301,000 Tropical shares [the three institutional investors] and informal indications to accept an additional 80,000
shares.

The tender offer was predicated on its acceptance by the holders of
80 percent of the outstanding Tropical stock.
On October 3, 1968, the following day, a special meeting of the
Tropical board was held with Billups, Hodge, Bevan, Kamsey, Halsey
and Clark present. The minutes of that meeting read in part:
Mr. Billups told the board that the meeting had been called on short
notice to consider the bid by Mapco, Inc., to take over this company.
He had learned of this proposal, he said, late in the afternoon of the
previous day through the financial press, without notice from Mapco of
any kind. He had declined comment on the proposal until the board could
be assembled for consideration of the matter and information could be
collected concerning Mapco and its offer.
Mr. Harned [John Harned, former senior vice presdient of Glore
Forgan] presented an analysis of Mapco's financial position and an investment banking analysis of the proposed transaction, which he thought




38
d i s a d v a n t a g e o u s to Tropical. Mr. Bevan, agreeing with t h e analysis, gave
his opinion of M a p c o ' s condition and prospects, and t h e probable value
of its stock. * * *

During the meeting, a resolution was adopted stating the board's
opposition to the exchange offer.
The minutes of the meeting also contain the following paragraph:
M r . Hodge advised t h e Board t h a t he h a d discussed M a p c o ' s offer
with M r . Snyder, who could not be present at the meeting, a n d t h a t M r .
Snyder h a d advised t h a t he was opposed to t h e acceptance offer. * * *

In a letter dated October 11, 1968, mailed to Tropical shareholders,
the company's board of directors set forth their reasons for opposing
the Mapco exchange offer. The following pertinent excerpts are quoted
from that letter:
Since well over 20 percent of Tropical's common stock is owned b y
your C o m p a n y ' s officers and directors, and members of their families
a n d b y other stockholders who have already advised m a n a g e m e n t t h a t
t h e y would reject t h e M a p c o offer, t h e exchange could not be 'tax free'—
a condition of t h e offer.
E v e n t h o u g h earnings per share of Tropical have been higher t h a n
those of M a p c o in ever}^ year for t h e past eight years, Mapco proposes
to offer only 9/10's of one of its common shares for each share of Tropical.
M a p c o is heavily burdened with debt. Its prospectus d a t e d April 17,
1968, showed total long t e r m debt of approximately $98,000,000 of
which more t h a n $17,000,000 was incurred subsequent to the beginning
of t h e year. This indebtedness was 70 percent of its total capitalization
as compared with common stock equity of only 21 percent with convertible preferred stock accounting for the balance. I n contrast, Tropical's capital s t r u c t u r e [as of] July 31, 1968, included 37 percent long
t e r m d e b t ($8,185,000) and common stock equity of 60 percent with
preferred stock accounting for t h e balance.
Mapco will have d e b t maturities aggregating $25,000,000 in 1959
and 1970. T h e necessity for refinancing so large a part of its total capitalization in two years could subject Mapco to severe financial pressure.
T h e interest costs on Mapco's debt in 1967 totalled $6,527,000 or
10.3 percent of Mapco's t o t a l revenues of $63,589,000. By comparison,
Tropical's 1967 interest costs were $635,000 or 2=9 percent of t o t a l
revenues of $22,274,000.

When he was questioned by staff investigators, Haslett said he
continued to authorize the purchase of Tropical stock for the Penn
Central after the October 2, 1968, tender offer announcement "because
the takeover price made Tropical stock appear cheap." He added that
he was not concerned about whether Mapco succeeded in its effort to
take over Tropical. He also said, "I was not aware that Penn Central
purchases of Tropical stock were driving the price u p . "
As indicated earlier in this section of the report, Billups and the
Tropical board made a point of noting that they were not aware of
Mapco's intentions prior to that company's October 2, 1968, press
release. When questioned about this, Thomas told staff investigators
t h a t he packaged the entire Mapco takeover attempt very quickly.
He stated that he (1) obtained assurances from the three institutional
investors that they would be willing to exchange their 301,000 shares
of Tropical for Mapco, (2) obtained the consent of Mapco's executive
committee to make the tender offer announcement, and (3) authorized
issuance of the press releases—all within a single 24-hour period
ending on October 2, 1968.
Thomas said that he had not spoken with Billups at any time during
the period leading up to the October 2 announcement, although he
tried to telephone Billups at his office and at his home on October 2



39
just prior to issuance of the press release concerning the tender offer
announcement. Thomas said he was told by Billups' office that Billups
was at his home. He said he then telephoned Billups 7 home where the
call was answered by Mrs. Billups. Thomas said there was a long
pause after he asked to speak to Billups during which he overheard
conversation involving a male voice in the background. Presently,
Mrs. Billups returned to the telephone to say that Billups was not
home.
The question arises that if Billups were at home at the time, why
w^ould he refuse to talk to Thomas, unless he already knew of Thomas'
plans to try to effect a Mapco takeover of Tropical?
All of this was said by Thomas in discussion of the question of
whether Billups had prior knowledge of Mapco's intention to effect a
merger with Tropical. Thomas asserted that he was certain that Billups
was aware of this effort. When asked to explain, he replied that he
understood that Snyder was working quietly behind the scenes to
arrange the merger on the most amicable basis possible and therefore
he, Snyder, must have spoken to Billups about the matter.
To questions as to why he did not attempt to contact Billups before
October 2, 1968, to try and make arrangements for a merger on a
mutually agreeable basis, Thomas said that he had expected Billups to
resist the merger effort and therefore the element of surprise was all
important. "The way to do these things/' Thomas said, "is to move
quickly."
Snyder was contacted in connection with Thomas' statement, and
the following exchange with staff investigators took place:
Q. When were you first aware of the merger?
A. I would have to look at t h e record. I a m n o t t h a t close to it now. I a m n o t
really clear about t h a t . . . I did have some information t h a t there were discussions going on with Mapco. I am not sure who was interested in Tropical—who
was discussing this with Mapco and M r . T h o m a s .
Q. Did you discuss this with Fred Billups•?
A. Do you mean formally?
Q. Well, informally?
A. I did not talk with Fred Billups.
Q. Do you have any recollection of when Mr. Billups or the Tropical Board became aware of Mapco's
intentions?
A. I a m afraid you are p u t t i n g questions t o me I couldn't answer t h a t
realistically.
Q. Do you have any records—a diary?
A. I did n o t keep such a thing. I was out on t h e edges of this t h i n g a n d n o t
really t h a t closely involved.
Q. Is Mr. Thomas' description of your attitude concerning the merger accurate?
A. N o , I wouldn't say t h a t . I t h i n k it was more concern on m y p a r t if t h e r e
was a n y friendly way to do this r a t h e r t h a n a combative w a y . And t h a t was m y
only concern.

In effect, this is the attitude that Thomas said was held by Snyder
concerning the merger.
In this connection, there is an interesting reference to Snyder in the
minutes of a special meeting of the Tropical board on November 20,
1968:
After referring briefly to operational developments, Mr. Billups opened
t h e meeting to discussion of t h e offer b y M a p c o , Inc. t o purchase from
t h e company for cash a t $32 per share t h e 230,000 shares of Tropical
C o m m o n Stock now in registration with t h e S E C .
Mr. Snyder informed t h e meeting t h a t he felt he should resign from t h e
Board of Directors on advice of counsel in order t h a t t h e Massachusetts
I n s t i t u t e of Technology, whose stockholdings in Tropical he represented




40
•on the board, might be free to sell all or part of its shares if it so desired,
without suspicion that it had acted on inside information obtained from
him as a Director. He added that MIT had not at present any plans to sell
its Tropical stock to Mapco, Inc. or to anyone else. After discussion, it
was agreed that Mr. Snyder would postpone his resignation at least
until further consideration had been given concerning it [until] after
the meeting but in the meantime he would not vote or be recorded as
voting on any matters coming before the meeting.

Snyder did resign from the Tropical board and was replaced by
M . J. Rathbone, a director of Executive Jet Aviation, in early 1969.
The rationale given for Snyder's resignation from the Tropical board
is puzzling. He was reportedly saying in effect that he wished to resign
so that M I T could sell its Tropical stock without complication, yet
M I T , at the time, had no intention of doing so. Snyder's resignation
from the board and the reason given for that resignation were viewed
b y staff investigators against an assertion made during the investigation by Stuart Patton, a Miami attorney who represented Tropical
when it w^as sued by Mapco. Patton told staff investigators that during
the discussion between Thomas and the three institutional investors
George Bennett, President of State Street Investment, told Thomas
t h a t he was prepared to biing into exchange for Mapco shares the
Tropical stock held by Yale, Harvard and State Street and that he
thought an exchange arrangement could also be made with M I T and
Northwestern Mutual Life Insurance Company, which also held large
blocks of Tropical stock. The deal for the M I T and Northwestern
Mutual stock, Patton said, never went through.
When contacted by staff investigators, Bennett stated that he had
asked Snyder to arrange the May 29, 1965, meeting between Billups
and the three insitutional investors. Bennett said he also talked to
Synder prior to the announcement of October 2, 1968, in an effort to
persuade Snyder to support Thomas' merger effort. Bennett said, "Joe
listened but said nothing to indicate his position. This, of course, was
to be expected inasmuch as he occupied an insider position."
The conversations between Thomas and the three institutional investors, the meeting of these investors with Billups during the months
leading up to Mapco's announcement of its intention to make a tender
offer to effect a merger with Tropical, and Thomas' unsuccessful efforts
to contact Billups by telephone all give rise to the question as to
whether Billups and other members of the Tropical board, namely
Bevan and Hodge, knew of Mapco's intentions before Mapco's public
announcement on October 2, 1968. If Bevan and Hodge were aware
of Mapco's plans before September 20, 1968, then this knowledge must
be considered in connection with the Penn Central's heavy purchases
of Tropical stock starting on that date. Just as Tropical later decided
to withdraw its registration for public sale of 230,000 shares of common
stock for fear it would be purchased by Mapco, so too would it be
logical for the Penn Central-Penphil-Glore Forgan combine, which
was in control of Tropical, to make large purchases of Tropical
stock to prevent such shares from being taken up by Mapco, which
would have resulted in the elimination of Penphil's control of Tropical.
Another mysterious aspect of the Mapco merger story involving
Herbert E. Fisher, Chairman of the Board of Kaneb Pipe Line Co.
of Houston, should be noted. Fisher is a Penphil member. Penphil




41
holds 30,488 shares of Kaneb stock, and the Penn Central holds
122,500 shares of Kaneb. David Bevan is a member of Kaneb's Board
of Directors.
Fisher told staff investigators that he had visited members of his
family in Tulsa, Oklahoma, during the Christmas season of 1968.
While there, he received a call from David Bevan who wanted Fisher's
opinion of Mapco. Fisher told staff investigators that he was put out
by such a call being made under the circumstances in which he found
himself, but that Bevan insisted on getting his opinion. He said he
told Bevan that he was not at his office and, therefore, could not refer
to hard data on Mapco, but that he thought that Mapco was not in a
sound financial condition. Fisher said he does not understand why
Bevan would make a call to ask for his opinion on Mapco nearly three
months after Bevan, Hodge and other members of the Tropical board
had voted to oppose the Mapco takeover effort.
In this connection, it is interesting to note that Haslett, who was an
assistant to Bevan, told staff investigators that he was not concerned
about the prospect of Mapco taking over Tropical Gas. This in turn
raises questions about whether Bevan had ultimately decided to play
the odds and go with whatever force seemed strongest in the MapcoTropical battle.
Tropical Epilogue
Subsequently, in October 1969, Tropical Gas merged with and
became a wholly-owned subsidiary of U.S. Freight Company.
Billups and Hodge became members of the U.S. Freight Board of
Directors. Billups died on May 15, 1970.
As a result of the merger, Penphil received 8,900 shares of U.S.
Freight stock in exchange for its 10,000 shares of Tropical. Penn
Central received 79,566 shares of U.S. Freight in exchange for its
89,400 shares of Tropical.
The new combined Penphil-Penn Central holdings in U.S. Freight
Co.—88,466 shares—represented less than 1.3% of the outstanding
stock of U.S. Freight Co. In addition, following Mr. Billups' death,
Penphil had only one director interlock with U.S. Freight. Accordingly, the Penphil-Penn Central-Glore Forgan combine could not
exercise control over the activities of U.S. Freight Company.
This situation should be noted in connection with the fact that the
U.S. Freight stock was one of the two holdings sold by Penphil in the
summer of 1970 in order to reduce the balance of its outstanding loans
to Chemical Bank.
P E N P H I l / S FLORIDA BANK INVOLVEMENT

Letter dated December 23, 1966, from Benjamin Sawin to Thomas
Fleming, J r :
Confirming our conversation yesterday, there will be a wire transfer
of $250,000 from the Chemical to t h e First B a n k a n d T r u s t C o m p a n y of
Boca R a t o n on December 30. I have already asked T o m Bevan to work
o u t t h e arrangements for availability of these funds as t h e rights a n d / o r
blocks of stock become available directly from M o r g a n Zook [then
executive vice president, First B a n k a n d T r u s t C o m p a n y , Boca R a t o n . ]
This will also confirm our understanding t h a t so far as possible t h e
acquisition of stock will be on t h e basis of $200,000 for First B a n k a n d
T r u s t Company [of Boca R a t o n ] a n d $100,000 for University National
B a n k [of Boca Raton] * * *




42
Letter dated January 10, 1967, from Thomas Bevan to Morgan
Zook:
Enclosed is a certified copy of resolutions and signature cards covering
t h e Escrow Account of Penphil Co. in your bank. This morning I talked
to Chemical Bank of New York a n d arranged to send $50,000 as additional funds for this account.
This will also confirm m y s t a t e m e n t to you over t h e telephone a u t h o r izing t h e purchase of shares of University Bank at $20 per share.

With this transaction, Penphil entered the Florida banking industry. By the end of 1968, the company held investments in the two
banks costing $427,108. On September 1, 1970, the stock was valued
at $1,244,852, constituting a paper profit of over 191 percent.
The breakdown of PenphiFs investment in the two banks is as
follows:
First Bank and Trust Company of Boca Raton, 21,380 shares costing $332,924 and having a market value of $964,772 on September 1,
1970.#
University National Bank, 4,868 shares costing $94,184 and having
a market value of $280,080 on^September 1, 1970.
In addition, Penphil has joined with a group of Florida bankers,
real estate dealers, contractors and lawyers in an effort to establish
a new commercial bank at Deerfield Beach, Florida. Ultimately,
Penphil was to have purchased a five percent interest in the planned
lending institution, the application for which is still pending before
the Comptroller of the Currency. So far, Penphil has invested $12,886
as its share of site acquisition costs and expenses.
On October 20, 1970, Thomas Bevan wrote to Fleming:
This is t o advise you t h a t it will not be feasible for this c o m p a n y
[Penphil] t o pick u p its c o m m i t m e n t for the 5,000 shares of the proposed
N a t i o n a l B a n k of Deerfield. Accordingly, we hereby release the incorporators of t h e B a n k from the obligation to issue such shares a n d
request t h a t you r e t u r n t o us the $12,886.11 which this c o m p a n y paid
t o you in connection with acquisition costs and expenses.

Fleming told staff investigators that he has declined to return the
money to Penphil because of what he said were heavy expenses in
connection with the effort to establish the bank. He said it was his
understanding that Penphil made the request because it needed this
cash.
The man who was instrumental in drawing Penphil's attention to
Florida banking investments was Benjamin F. Sawin, Chairman of the
Board of Provident International, a division of the Provident National
Bank of Philadelphia, where the Penn Central maintained major
deposit and loan accounts. Bevan and Gerstnecker were on the Provident National Bank's Board of Directors. In 1969, Gerstnecker was
made Vice Chairman of the board. He resigned from that position
in January 1971. One of the original 16 organizers of Penphil, Sawin
has had a residence in Boca Raton for some years. During visits there
he struck up a friendship with his fellow banker and neighbor, Thomas
Fleming, Chairman of the Board both of First Bank and Trust and
University National.
After conferring with Fleming, Sawin wrote a detailed memorandum
on December 8, 1966, to the Penphil Acceptance Committee outlining the dramatic growth of Boca Raton, Brow^ard and Palm
Beach Counties by way of setting forth a rationale for PenphiPs
investment in the two Boca Raton banks which serve the region. He



43
pointed out that the population of Broward County had risen from
39,794 in 1940 to 500,400 in 1966, and that Palm Beach County had
a population which rose from 78,989 to 320,000 during the same period.
The population of Boca Raton, which is in Palm Beach County, went
from 723 persons in 1940 to an estimated 17,900 in 1966. I t was
asserted that Broward was Florida's fastest growing county.
Sawin also noted that total deposits of First Bank and Trust and
University National combined amounted to $26.7 million in 1966,
compared with total deposits of $22.2 million in the Boca Raton
National Bank, the only other commercial bank in town. Projections
cited called for First Bank and Trust and University National deposits to increase to 52.8 million, or 54.6 percent of total bank deposits
in the community by 1970.
The projections turned out to be on the conservative side. Polk's
World Bank Directory of September, 1970, shows that the combined
deposits of First Bank and Trust and University National totaled
$66,335,240 and that their combined assets totaled $74,480,294. By
comparison, Boca Raton National Bank had total deposits of $45,171,041, and total assets of $50,222,612. In other words, First Bank
and Trust and University held 58 percent of all commercial bank
deposits and 59 percent of all commercial bank assets in Boca Raton
in the middle of 1970. These figures make it clear that First Bank
and Trust and University National have assumed a dominant position in commercial banking in the immediate Boca Raton area.
Riviera Beach, the nearest community to Boca Raton, has two banks.
These are First Marine Bank and Trust Company with assets of
$46,781,151, and First National Bank and Trust Company with assets
of $29,183,113, according to Polk's World Bank Directory of Septemper, 1970.
About midway through the December 9, 1966, memorandum,
Sawin noted a sharp decline in First Bank and Trust deposits between 1964 and 1965, and commented:
The downward trend might be explained in part at least by Mr.
Fleming's activities on behalf of London B. Johnson in the last election
when he acted as his Campaign Manager for the state of Florida. Boca
Raton is a strong Republican community. I have discussed this matter
with Mr. Fleming and he believes he has mended most of his fences and
at the present time his past political activities are being forgotten.

The conclusion of the memorandum contains the following statement:
In the event it is decided to proceed, and I have been unable to uncover any reason why we should not, Mr. Fleming is quite anxious to
know as soon as possible so that we can conclude the negotiations and
he can start accumulating First Bank and Trust stock, and more particularly the stock of University National where he expects to encounter
more difficulty.
If the Acceptance Committee desires to proceed, will you signify your
approval on the copy attached so that I may immediately conclude
negotiations with Mr. Fleming and also use this as authority for Tom
Bevan to have the funds available so the stock can be accumulated.

The left bottom corner of the last page of a copy of the memorandum
contains the notation and signature, "Approved, Charles J. Hodge,
Chairman, Acceptance Committee."
Although the memorandum did not mention this, it should be noted
that the Arvida Corporation, 58.3 percent of the stock of which is




44
owned by the Pennsylvania Company, owns and operates a large
luxury resort facility, the Boca Raton Hotel and Country Club, and
has made Boca Raton the site of a major real estate development
project. These facilities and investments have a direct bearing on
economic growth and prosperity in the area served by the two Boca
Raton banks in question. Details on Arvida are given elsewhere in
this report.
A few months later, in early 1967, Sawin was elected a Vice President of Penphil and about a year later the way was cleared for him to
become a member of the Boards of Directors of First Bank and
Trust and University National. The first item of the June 30, 1968
financial statement of Penphil declares:
On F e b r u a r y 20, 1968, t h e Executive Committee of t h e Board of
Directors authorized t h e transfer to an officer and stockholder of t h e
C o m p a n y of 200 shares each of t h e capital stock owned b y t h e C o m p a n y ,
of First B a n k a n d T r u s t C o m p a n y of Boca R a t o n , National Association,
a n d of University National Bank of Boca R a t o n , to be used as qualifying shares for membership on the Board of Directors of these b a n k s . An
agreement was executed to return said capital stock certificates t o t h e
company upon d e m a n d . T h e indebtedness to the C o m p a n y has been
valued a t cost of t h e shares transferred.

In other words, it was at the will of Penphil that Sawin was serving
as a director of the two Boca Raton banks and his position with these
banks could be terminated simply by recalling the stock transferred
to him. These circumstances automatically give rise to the question
of whether Sawin felt his primary responsibility was to the banks or
to Penphil.
Four months later, on June 3, 1968, Sawin wrote a memorandum to
David Bevan proposing that Penphil expand its Florida bank holdings. Sawin stated:
As you will probably recall, on several occasions during t h e p a s t winter,
I a t t e m p t e d to look into t h e situation as it concerned t h e Deerfield B a n k ,
Deerfield Beach. I uncovered sufficient information t o lose interest in
acquiring it because of t h e rumored condition of some of its loans a n d
t h e background of t h e people who controlled it. More recently, M o r g a n
Zook has looked into t h e situation with t h e same conclusions.
Concurrently w i t h all this, another group has acquired a charter for a
new national b a n k in Deerfield Beach. They represent a generally favorable r e p u t a t i o n b u t n o b a n k i n g experience. U p o n uncovering this situation and as several of t h e organizers were well known to T o m Fleming,
he has talked t h e m into a 35 percent interest of which he will keep 10
percent t o 15 percent. T h e balance will be distributed in blocks of 5 percent each to Penphil and others known to him.
I t will be agreed t h a t Bill Stowe [William M. Stowe, then President of
a n d a director b o t h of First Bank and T r u s t and Universitj^ National
Bank] will go down to s t a r t t h e b a n k out, which he is entirely capable of
doing.

Fleming told staff investigators that Stowe was to be president and
a director of the new Deerfield Beach bank.
The June 1968 Sawin memorandum continues:
At T o m ' s suggestion t h e group also has an option on a piece of ground
which in m y opinion would represent just a b o u t the ideal location for a
b a n k in Deerfield.* * *
I would r e c o m m e n d t h a t Penphil acquire a t least the 5 percent t e n t a tively allotted a n d more, if possible. T h e original capitalization will
p r o b a b l y be a b o u t $1 million, so we would be thinking of a m i n i m u m
$50,000.* * *




45
Sawin's memorandum also dealt with the financial needs of First
Bank and Trust. He wrote:
For some time we have been aware of the eventual need for additional
capital for the First Bank and Trust Company of Boca Raton, National
Association. This has been evidenced by comments of the Bank Examiners as well as the very rapid growth in deposits. It has apparently
come to the point now where something will have to be done. I have
agreed all along with Morgan and Tom, particularly Tom, that we
should keep ourselves out of a debenture position as long as we possibly
could, which would be particularly true in this kind of market. Eventually, we may have to do a debenture job, but the larger the bank is
obviously the better its credit will be, and so I would be hopeful this
could be put off but that we could satisfy the Examiners with the
issuance of more capital stock. If this matter comes up at the June
Board Meeting, if possible, I will attend and will have more of the current
thinking and detailed information. * * *
Will you kindly discuss this with the other members of the Executive
Committee and advise me as to how much money will be available and
how far you would care to go.
On June 5, 1968, David Bevan wrote the following letter to members
of the Penphil Acceptance Committee, then consisting of Cannon,,
Haslett, Hodge, Horner and Stevens:
Enclosed is a copy of memorandum from B. F. Sawin. I would recommend that you accept his recommendations and that we go as far as
we can in conjunction with these two items up to a total of $250,000.
If this is authorized, we will make sure ahead of time that this amount
of money can be borrowed, but I think it is unlikely that we can invest
probably more than $150,000 to $200,000.
Please let me have your reaction as promptly as possible.
Hodge replied on June 7, 1968:
With reference to your letter of June 5, 1968, and memorandum from
Ben, I concur completely with Ben's recommendation and you have
herewith my affirmative vote.
Sawin's memorandum and PenplnTs response to it provides a fairly
graphic description of the information pipeline Penphil had established
inside the two Boca Raton banks. Sawin's memorandum also makes it
difficult to resist the conclusion t h a t any information he acquired t h a t
might be of any conceivable use to Penphil was promptly passed to
Penphil.
T h a t Sawin's role as agent for Penphil at First Bank and Trust and
University National was known to senior officers of those banks is.
indicated by the following letter dated August 20, 1968, from Thomas
Bevan to Zook.
I am enclosing herewith Warrant No. 319 in the name of Penphil Co.
and Warrant No. 339 in Ben Sawin's name, which has been duly assigned
to Penphil Co. These warrants cover 9,075 rights—or 1,815 shares.
You will find enclosed a check of Penphil Co. in the amount of
$90,750.00, dated August 30, 1968, which I would appreciate your
submitting—together with the warrants—to your Transfer Department
on August 30 of this year.
The link between Penphil and the two banks became even stronger
later in t h a t year. A letter dated December 10, 1968, from D a v i d
Bevan to Sawin, reads as follows:
Enclosed is a balance sheet of Penphil which you can show and go
over with Tom Fleming. You will recall that we promised him an opportunity to participate at some point.




46
As you know, we are offering all stockholders the right to subscribe
to an additional 300 shares at $35 a share. Carroll Seward is liquidating
his interest in Penphil at the same price since he is about to retire. At
the present time he holds a total of 3,000 shares. Connie [Cornelius]
Dorsey would like to acquire about 600 to 700 shares and Tom Fleming
can have all or any part of the balance.
The price of $35 was below the market at the time the circular was
sent out to all members. I think the market value was about $37 a share.
Without re-evaluation, I cannot tell you what it is now but there is a
substantial rise. Our biggest holding is Kaneb and I would guess it
would be $2 or $3 higher, so it represents a real opportunity and bargain
price for Tom. We have to know promptly whether or not he wants in. If
he does not we will just have the company [Penphil] bu}^ the stock.
Fleming wrote to David Bevan on December 10, 1968:
Ben Sawin showed me your letter of December 10 in which you advised that Mr. Carroll Seward is liquidating his interest in Penphil at $35
a share. Of the approximate 3,000 shares which he now holds, you stated
that Connie Dorsey would like to acquire 600 to 700 shares and that I
could have all or any of the balance at $35 per share.
This is to advise you that I am thrilled and delighted and want to
take all of the stock that is left. Therefore, I am making my plans to pay
for 2300 or 2400 shares of stock.
I am so happy to join this exalted group of gentlemen investors about
whom I have heard so much. I want to thank you for this opportunity to
join your group.
On. December 23, 1968, Thomas Bevan wrote to Fleming:
Dave has forwarded to me your letter of December 16, in which you
expressed an interest in acquiring Penphil shares from Carroll Seward at
$35 a share. I have talked to Connie Dorsey who wishes to acquire 715
shares, which would leave the balance available to you of 2,285 shares.
Will you please advise me if you are still interested, and if so, when
you can make payment on these shares.
We will be delighted to have you as a member of our group and I hope
I can see you the next time I am in Florida.
Fleming was indeed still interested and forthwith became a Penphil
shareholder. In the process, based on David Be van's estimates of the
selling price and market value of the stock, Fleming made a paper
profit of $11,425 the moment he became the owner of the stock.
Fleming told staff investigators that he thinks Sawin introduced
him to the idea of becoming a Penphil member. Fleming asserted,
" I wanted the stock because it meant something to be associated
with these men." Apparently the association held appreciably less
meaning to him after the collapse of the Penn Central because he
told investigators that he agreed with the August 1970 decision
(later rescinded) to liquidate Penphil. When asked why, he said, "I
needed the cash."
Papers submitted to the staff by David Bevan make it clear t h a t
Fleming had invited Penphil to accept membership among a group
which was intent on expanding their Florida bank holdings to include
new investments on both coasts of the state. On February 5, 1969,
Thomas Bevan wrote David Bevan:
. . . I have received a call from Ben [Sawin] who had three items he
wanted me to raise with you:
1. In two or three months we will need approximately $15,000 in
connection with the real estate for the proposed Delray bank [in the
next town north of Boca Raton]. Tom Fleming is trying to get this
[bank approval] through Washington and it looks as if it will take some
time.




47
2. Tom Fleming indicates that we have a chance to buy, with his
group, a bank at Sarasota [where Arvida had real estate holdings] which
will cost $3,000,000. Our share will cost approximately $300,000 representing 10 percent of the whole deal.
3. The Stock in the First Bank and Trust Company of Boca Raton
has been split 2 for 1 and is now selling for $57, which is equivalent to $114
per share on the pre-split stock. He wants to know whether he should buy
some more of this since it will become available because of having been
split.
I have mentioned some of these things to Larry Stevens and Warren
Bodman, so I think it would be wise to discuss this with the Investment
committee. . . .

When he was questioned on these points, Fleming denied any
knowledge of a proposed bank at Delray. He also indicated that the
deal to purchase the Sarasota bank fell through.
In September 1969, Fleming publicly announced that the directors
of the First Bank and Trust Co. of Boca Raton, University National
Bank of Boca Raton, First National Bank and Trust Company of
Riviera Beach and Citizens Bank of Palm Beach County had approved
affiliation of their institutions with a proposed registered bank holding
company, First Bancshares of Florida, Inc., of which Fleming would
be Chairman of the Board. Thus, First Bank and Trust and University
National joined the trend of creating registered bank holding companies—a trend that has come to dominate Florida commercial
banking because it provides a mechanism by which Florida's prohibition against branch banking is being circumvented. Although all four
banks are relatively small, their combined assets total $116.7 million
a figure big enough to allow the four to collectively compete with much
larger institutions in the surrounding area, including Palm Beach and
Fort Lauderdale.
In the process of forming the new holding company, Sawin showed
Penphil how he thought the company could save $100,000. On
November 14, 1969, Sawin wrote to Thomas Bevan:
Pursuant to our recent conversations, particularly with Dave, it appears that it may be possible to pick up in the neighborhood of 10,000
shares of the First National Bank of Riviera Beach. . . .
It appears that if the acquisition can be made that the price will be
somewhere between $55 and $60 per share, probably closer to the latter
figure. . . .
As the agreed upon arrangement provided for a share per share exchange of the holding company for the banks involved, it appears that
the possibility of being able to purchase the aforementioned shares of
First National Bank of Riviera Beach at or around $60, as compared to
the purchase of roughly a like amount of shares in the First Bank and
Trust, would be a distinct advantage to our group.
Why don't you present the proposal to the finance committee on two
bases.
#1—Authorize me to negotiate for the shares of the First National
of Riviera Beach up to $60 a share and, if this is not possible and it
well may be I cannot pick up the stock, then I would also like authorization to purchase, again if possible, up to 10,000 shares of First Bank
and Trust at a price of $70.

Five days later, on November 19, 1969, Thomas Bevan wrote members of the Penphil Investment Committee:
. . . It is Ben's thought to acquire 10,000 shares of the Riveria Bank,
if possible, and to realize $10 per share in an arbitrage, upon the exchange
of shares for the holding company [stock].




48
Fleming denied any knowledge of this proposed transaction, but
added that Penphil did not purchase shares of Riviera Beach. He
seemed disturbed that such a proposal had been made to Penphil,
saying, "Why, that would have amounted to the purchase of more
than 10 percent of the outstanding shares of Riviera." At the time,
there were 99,000 shares outstanding.
First Bancshares of Florida, Inc. became a registered bank holding
company on October 15, 1970. Penphil exchanged its holdings of stock
in the two Boca Raton banks for an equal number of shares of the
bank holding company's stock. Penphil's 26,048 shares of First Bancshares represent about 5 percent of the outstanding shares of the
holding company.
Since Fleming played an instrumental role in PenphiPs Florida bank
stock holdings, it should be noted that his banking career went beyond
the activities so far described in this section of the report. Fleming
told staff investigators that Comer J. Kimball, then Chairman of the
Board of First National Bank of Miami, Florida's largest commercial
bank, invited him to become a senior officer in that institution in 1966.
He said he accepted and was elected Vice Chairman of the Board with
instructions from Kimball to develop and help execute methods by
which First National of Miami would increase its assets from about
$500 million to $1 billion. He said his three-year stay at the bank was
burdened by what he described as a frustrating relationship with
Harry Hood Bassett, who was President of the institution at the
time Fleming joined the bank, and who became Chairman of the
Board shortly thereafter. Fleming asserted his decisions were
continuously overruled by Bassett. He said he finally gave up and
returned to full-time work at First Bank and Trust and University
National at Boca Raton in 1969. Fleming had remained Chairman of
the Board of both of these banks during his time with First National
of Miami.
A somewhat different version was given by Louis J. Hector, General
Counsel for First National Bank of Miami and Chairman of the
Executive Committee of Southeast Bancorporation, Inc., the registered
bank holding company with which First National is affiliated. Hector
said that Fleming was viewed by Kimball and other members of
First National's board as a dynamic, imaginative and rising figure in
the Florida banking industry. Hector said Fleming was made President
of Southeast Bancorporation in addition to being elected Vice
Chairman of First National's board, but later was made Vice President
of the holding company because he lacked the talent and perseverance
necessary to make the daily wade through vital corporate details.
Hector said Fleming was "used" in the State Capital, Tallahassee.
Eventually, Hector said, Fleming began to spend increasing amounts
of time on business connected with his Boca Raton banks, highlighted
by efforts to create First Bancshares of Florida. During this period
Southeast Bancorporation was also formed and, Hector said, it became apparent that the two holding companies would probably be in
competition with each other. Hector said Fleming was asked in 1969
not to stand for reelection to the positions held in First National and
Southeast Bancorporation.
The information cited above makes clear Penphil's interest in
achieving substantial investments in a number of Florida banks by
acting on advice supplied by Sawin and Fleming. Moreover, Sawin



49
and Fleming were clearly at PenphiVs service by virtue of the fact that
Sawin's way into the First Bank and Trust and University National
Bank was provided by Penphil and Fleming's obvious awe of the
Penphil leadership, coupled with expressed delight at being allowed to
purchase shares in the company. In addition, it cannot be ignored
that PenphiPs bank holdings put it in a position to tap large new
financial resources necessary to carry out David Bevan's plans to
turn Penphil into a substantial holding and operating conglomerate
detailed later in this report.
PenphiPs investments in the Boca Raton banks and its subsequent
exchange of this stock for shares in First Bancshares of Florida, a
dominant force in commercial banking in the area, takes on far more
meaning when the following is recognized:
1. Boca Raton is the location of large real estate development
programs being conducted by the Arvida Corporation, which is 58
percent owned by the Penn Central.
2. Arvida's board of directors is controlled by Penn Central officers.
David Bevan and Charles Hodge were among the Penn Central
representatives on the Arvida board.
3. The president and vice president of Arvida are Penphil shareholders.
4. David Bevan and Hodge controlled the investment programs of
both Penphil and Penn Central.
All of these elements add up to a situation in which David Bevan
and Hodge had maneuvered Penphil into a position to take advantage
of the opportunity to profit from Arvida's real estate activities in
the fastest growing area of Florida.
Penn Central's investment in Arvida is detailed in the following
section of the report.
INTERLOCKING RELATIONSHIPS WITH ARVIDA

Excerpt from the July 20, 1965, meeting of the Executive Committee
of the Pennsylvania Railroad Company's Board of Directors:
T h e Chairman of t h e Finance Committee [David Bevan] reported
t h a t studies have been m a d e of t h e current position and future prospects
of t h e Arvida Corporation, a real estate development firm owning about
100,000 acres of land on b o t h t h e east and west coasts of Florida, in t h e
Miami-Fort Lauderdale-Palm Beach areas and adjacent to Sarasota.
T h e land was acquired beginning in 1947 by the late A r t h u r Vining
Davis a n d sold to t h e Arvida Corporation after its formation in 1958.
Arvida's principal activity is selling a n d developing these properties,
which are presently being managed by Stockton, Whatley, Davin and
Company, a prominent Florida real estate m a n a g e m e n t company.
Among Arvida's properties are 25,000 acres now leased to AerojetGeneral Corporation, sole contractor for solid fuel rockets, t h e Boca
R a t o n Hotel and extensive oceanfront property a t Boca R a t o n . Ba^ed
on a price of $6 a share, t h e outstanding stock of Arvida represents a
value of approximately $36,000,000, with estimates of t h e net w o r t h per
share, depending upon how the real estate is valued, ranging u p to $14
and $15. Earnings for the fiscal year ending J u l v 21, 1965, are estimated
at $500,000.
T h e Chairman of t h e Finance Committee s t a t e d t h a t as a further
step in t h e diversification program, it is proposed t h a t a controlling
interest in Arvida Corporation be acquired through t h e purchase, principally from t h e estate of A r t h u r Vining Davis, of 3,400,000 shares
[approximately 55%] of such stock a t $6 a share, or approximately
$20,400,000, p a y m e n t therefore to be made in three a n n u a l installments;




50
a n d t h a t Stockton, Whatley, D a v i n a n d C o m p a n y [SWD], which will
continue t o m a n a g e t h e properties a t the present fee of $150,000 a
year, would be granted t h e right to purchase, over a five-year period,
approximately 3 5 % of t h e n u m b e r of shares purchased b y this c o m p a n y
directly or indirectly from t h e estate of A r t h u r Vining Davis. H e s t a t e d
t h a t t h e Stockton company has agreed not to purchase additional shares
of Arvida on t h e open m a r k e t and t h a t this company m a y purchase
such additional shares as it deems desirable. H e s t a t e d further t h a t it
is desired to sell t o Pennsylvania Comapn}^ [the R a i l r o a d ' s whollyowned subsidiary] t h e stock of Arvida to be acquired.

The minutes disclose that after discussion, which was not detailed
in the minutes, authorization by the Pennsylvania Railroad Co. for
purchase of the Arvida stock was given. One-third of the total cost
was to be paid at settlement, one-third one 3^ear later, and the remaining one-third two }^ears later.
Authorization was also given for the sale to SWD of up to 10 percent
of the Arvida stock held by the Pennsylvania Company, plus an option
to purchase an additional amount of stock equal to 25 percent of the
holdings of the Pennsylvania Company over the next five years at
$6 a share plus a carrying charge amounting to 6 percent for the first
option year and an additional 6 percent for each option year thereafter.
The result of the transaction is described in a report filed by Arvida
with SEC, dated August 10, 1965. That report states in part:
* * * On J u l y 26, 1965, t h e Pennsylvania Railroad C o m p a n y
purchased 3,274,428 shares of Arvida Corporation Class A common
stock from t h e estate of Arthur Vining Davis. Immediately thereafter
t h e Pennsylvania Railroad Company sold 222,351 of these shares to
Stockton, Whatley, Davin & Company a n d retained 3,052,077 shares,
representing 51 percent of the total outstanding stock of Arvida Corporation. Both sales were m a d e a t a price of $6.00 per share. Stockton,
Whatley, Davin & Company, a wholly-owned subsidiary of General
American Oil C o m p a n y of Texas, also received an option from t h e
Pennsylvania Company for t h e purchase of an additional 923,698 shares
a t a price of $6.00 per share plus certain specified carrying charges.
T h e option was exercisable in annual installments over a five-year period
a n d was cumulative. * * *

Brown Whatley told staff investigators that David Bevan urged
Stockton, Whatley, Davin and Company not to exercise its option
to purchase the additional 923,698 shares of Arvida stock during the
initial years the option was in effect. Mr. Bevan's rationale, according
to Mr. Whatley, was that exercise of the option would reduce Penn
Central's holdings in Arvida to less than 50 percent and, if this
occurred, Penn Central could no longer include Arvida in its consolidated income reports. I t is hard to understand Mr. Bevan's concern
over including Arvida in the Penn Central's consolidated reporting
procedures, since Arvida's annual net income—which has averaged
only about $500,000 a year—is completely insignificant when considered within the total Penn Central corporate picture.
Whatley told staff investigators that it was his understanding- that
the Pennsylvania Company had planned to ultimately own at least
80 percent of the outstanding shares of Arvida in order to achieve
tax advantages that could be obtained when the investment reached
this level. He said Penn Central apparently failed to do this because
of the depletion of its cash resources and because its stock was not
attractive enough to be accepted in an exchange offer by the minority
stockholders of Arvida.




51
Whatley said that because of Arvida's uncertain future following
the collapse of the Penn Central Transportation Company, SWD
asked for and received a 90-day extension on its option to purchase
additional Arvida stock when the option agreement was due to expire
in July of 1970. When the expiration date of the extended option
agreement approached in October, SWD asked for another 90-day
extension, but the Penn Central refused and the option was withdrawn.
During the 90-day extended option period, SWD negotiated a new
management contract with Arvida, raising its annual fee from $150,000
to $240,000.
The purchase of 222,351 shares of Arvida stock by SWD in 1965
made it the second largest Arvida stockholder. Brown Whatley told
staff investigators that SWD had notified Arvida that it did not
intend to continue to provide management services for Arvida after
1964 because it was not being paid enough under its $150,000 a year
plus expenses contract. Whatley said that Penn Central, which began
negotiating for purchase of Arvida stock in 1964, would not make the
investment unless SWD, which is one of the largest mortgage bankers
in the southeast, continued to manage the real estate development
company. I t should be pointed out that Whatley and Davin owned
24 percent and 38 percent, respectively, of the outstanding stock of
Genera] American Oil, which owns 100 percent of SWD.
The August 10, 1965, Arvida report to the SEC notes that following
the Penn Central takeover all outstanding shares of Arvida Class B
common stock were converted into an equal number of shares of Class
A common stock, and that the twelve-member Arvida Board of Directors was increased to fifteen by the election of three new Board members.
The three new Board members were David Bevan, Stuart Saunders
and Charles Hodge. William Gerstnecker was elected to the Arvida
Board in September of 1965, and Angus G. Wynne, Jr., Chairman of
the Board and President of Great Southwest Corporation (which was
controlled by Penn Central), was named to the Arvida Board in
December of 1965. Brown Whatley and Joseph Davin of SWD and
W. E. Dunwody, Jr., a partner in the law firm of Mershon, Sawyer,
Johnston, Dunwody & Cole, the General Counsel for Arvida, were
already on the Arvida Board. Moreover, Bevan, Saunders, Hodge and
Whatley were made members of the Arvida Executive Committee.
Not only did Penn Central control the Arvida Board, but six of the
15-member Board were Penphil shareholders. Since David Bevan and
Charles Hodge controlled the investment programs of both Penn
Central and Penphil, and since Whatley considered Bevan to be his
"boss," Penphil was in a position to control the real estate activities
of Arvida.
Whatley told staff investigators that despite the fact he had invested
$25,000 in Penphil, he did not make any effort to familiarize himself
with PenpluTs holdings. He stated that his only purpose in joining
Penphil was to "cement relationships with the Railroad."
The Penn Central purchase of a controlling interest in Arvida was
preceded by the purchase of condominium apartments from Arvida by
David Bevan and Hodge. Located at Arvida's Sabal Point development at Boca Raton, apartment 404, which was purchased by Bevan,
was priced at $46,750 and apartment 504, which was bought by Hodge,




52
was priced at $47,250. Correspondence regarding these transactions
which was submitted to the staff by Arvida indicates that Bevan
paid for his apartment in full with the proceeds of a loan from the
Chemical Bank. The warranty deed is dated June 23, 1965. Hodge
financed slightly less than half the cost of his apartment with a
mortgage issued by Aetna Life Insurance Company in the amount of
$22,000 for 20 years at 6 percent interest. The closing for this transaction is dated July 12, 1965. About a year later, Hodge requested
written affirmation from Arvida that he did not receive a price break
on his apartment by virtue of his position on the Arvida Board of
Directors and his connection with the Pennsylvania Railroad Company. On May 2, 1966, Brown L. Whatley, President of Arvida, wrote
Hodge :
Frank Steffens has written you in compliance with your request for
some file evidence that you received no special treatment of any kind in
connection with your purchase of your condominium unit in Sabal Point
Apartments. Nevertheless, I wanted to supplement his letter with a
statement of my own.
Like everyone else who purchased one of our apartments at Sabal
Point, you paid the full price. We have made no price concession, reduction or rebates to any of our apartment purchasers.
The sale to you was handled in the normal way with the sales personnel at the office in the Sabal Point model apartment building, next
door to the apartment building itself. No favors, special consideration,
changes or adjustments in price or terms were asked for or granted. Our
staff people and our records will substantiate these statements.

At the bottom of the letter there is a notation, "Same letter to
Bevan."
Another member of Penphil known to have purchased Arvida
real estate is Harry F . Ortlip, a Philadelphia electrical contractor and
real estate dealer. Ortlip purchased 13^ lots at the Arvida-owned Royal
Palm Yacht and Country Club in Palm Beach County. Documents
regarding this case show the satisfaction of an $8,000 mortgage dated
September 1, 1959, carrying interest of 6 percent and due January 1,
1961. In addition to the $8,000 sum, Ortlip paid $29,134 in cash for
the property, bringing the total cost to $37,134. Immediately after
purchase, Ortlip commissioned the construction of a home on the
property.
Frank M. Steffens, Arvida's Senior Vice President for administration and finance, gave the following description of the financial arrangements made by Arvida to obtain the funds it needed to operate.
Construction loans were obtained from the First National Bank of
Miami, Florida National Bank and Trust Company of Miami, Palmer
First National Bank and Trust Company at Sarasota, Chemical Bank
New York Trust Company, First National City Bank of New York,
Chase Manhattan Bank, and First National Bank of Boston. Comer
Kimball, former Chairman of the Board of First National Bank of
Miami, was also a former president of Arvida. Steffens said he thinks
that David Bevan and Gerstnecker played a role in introducing
Arvida to Chemical, First National City and Chase Manhattan by
virtue of the fact that the Penn Central had major accounts with all
these banks. Whatley established the contacts with the First National Bank of Boston, Steffens said.
Arvida's method of developing real estate can be described as
follows.




53
After construction is completed and the property is ready for sale,
a blanket mortgage on the buildings and sites is obtained from Aetna
Life Insurance Company. Arvida's annual report for 1969 shows t h a t
it owed Aetna $23,325,000 at 6% percent and t h a t Aetna had committed itself to advance an additional $7,000,000 and to extend the
pa}^ment terms of the loan from 17 to 25 years under an overall
interest rate of 7.3 percent. Aetna had also been granted a right to
participate in the earnings of an Arvida operating facility and had been
given option to purchase designated acreage at its current market
value.
I n addition to these financial relationships, Arvida also maintained
deposit accounts for its Boca Raton Hotel and Club in the First Bank
and Trust Company of Boca R a t o n and the Boca Raton National
Bank. The circumstances regarding the establishment of these accounts
and what changes occurred thereafter are described in a letter from
Steffens to David Bevan, dated M a y 11, 1970. I t reads as follows:
The operating bank account for the Boca Raton Hotel and Club was
originally established at the Boca Raton National Bank by former
management officials of Arvida Corporation, who were also the organizers, major stockholders and management of the Boca Raton National
Bank. [Milton N. Weir, Sr. is president and chairman of the board of
Boca Raton National. He is a former president of Arvida.] These officers
discontinued their association with the Arvida Corporation in 1961.
The operating bank account for the Boca Raton Hotel and Club
was transferred to the First Bank and Trust Company of Boca Raton
from the Boca Raton National Bank on December 15, 1966. This was
accomplished by opening a new account at the First Bank and Trust
Company with a $20,000 deposit. The hotel accounting department
then commenced to draw operating disbursements against this account.
The Board of Directors of Arvida Corporation, on July 29, 1966,
formally approved and passed a resolution to open a new account at the
First Bank and Trust Company of Boca Raton, and the Executive Committee, on October 21, 1966, approved the transfer of the hotel operating
account to this new account.
The Executive Committee included Bevan and Hodge, who had p u t
their stamp of approval on Penphil's purchase of First Bank and
Trust Company stock during the previous month.
Returning to the letter:
The following table of annual debits summarized the volume of
business and activity in these bank accounts for the past five years.
First Bank &
Trust Co.
hotel account

1969
1968
1967
1966
1965

$10, 329, 700
7, 296, 462
6, 499, 167
97, 887

Boca Raton
National
Bank hotel
account

$6, 926, 286
6, 096, 057

Boca Raton
National
Bank regular
account
$1,952,023
266,370
675,458
253, 375
1, 036, 096

There are no service charges of any kind for these accounts.
In 1966 the company was in the process of negotiating several very
important property acquisitions which involved, directly and indirectly,
Mr. Thomas J. Fleming and his wife's family. Mr. Fleming, Chairman
of the Board of the First Bank and Trust Company of Boca Raton, was



54
at that time and is today, a prominent banker and influential local citizen. At that time, he was also serving as Vice Chairman of the Board of
the First National Bank of Miami, the largest bank in the state of
Florida and with whom Arvida Corporation conducted a considerable
amount of its banking business.
In 1966 Arvida (through a subsidiary company) granted to the IBM
Corporation a confidential option to purchase a large tract of land west of
Boca Raton as the site of a manufacturing plant and research facility.
Prior to IBM exercising this option, Arvida Corporation actively engaged in negotiations with several property owners in the area, including
Tom Fleming and his wife's family, to obtain options to acquire additional holdings which it was felt would increase in value when IBM exercised its option and their presence in the community became public
knowledge.
During the negotiations, Mr. Fleming mentioned several times his
desire for his bank to handle more banking business with Arvida Corporation, especially with the Boca Raton Hotel & Club. It was apparent at
that time that Mr. Fleming and his wife's family would hold substantial
purchase money mortgages from Arvida Corporation arising from the
purchase of the properties under option. These mortgages would be subject to continual modification in the future as to release provisions and
release prices, subordinations for rights-of-way, and joinder in plats as
development progressed.
The schedule of dates of both the IBM/Arvida option and the Arvida/
Fleming option indicate the interrelationship of these transactions:
IBM-Arvida
Letter of proposal
Date of option agreement
Date of closing

Arvida-Fleming

Apr. 8, 1966
May 19, 1966
Apr. 26, 1966 Sept. 29, 1966
Nov. 30, 1966 Jan. 3,1967

The length of time elapsed between the date of the IBM/Arvida
option agreement (April 26, 1966) and the Arvida/Fleming option agreement (Sept. 29, 1966) indicates the difficulty of the latter negotiations.
It was of vital importance, not only to gain the cooperation of the
sellers to acquire the options prior to disclosure of the IBM purchase but
also to continue this cooperation with them as mortgagees during the development phase which would require continual concessions on their part.
This property which was eventually acquired by exercise of these options is now the site of Arvida Corporation's multi-million dollar Boca
Raton West development.
In the 1966 discussions relating to the possible opening of a new
account with the First Bank and Trust Company of Boca Raton, Mr.
Fleming indicated that his bank would make available a substantial line
of credit to the company. This arrangement eventually culminated in a
$1,000,000 open line of credit to the company which has been used to
fund the hotel inventories, receivables and other operating costs during its
opening period each year. This line of credit has been important in
financing the holtel's working capital, especially after the recently completed expansion program. This line also was our first line of credit from a
Boca 2Raton bank as we had not borrowed or had a line with the other
bank.
Mr. Fleming's position in the Boca Raton community and as a
prominent Florida banker, the need for continual cooperation on the
part of him and his wife's family, and the availability of an open line of
credit at his bank were the reasons for my recommendation to the Board
of Directors and the Executive Committee that the hotel operating
account be transferred to the First Bank and Trust Company of Boca
Raton.
2
Steffens told staff investigators that later, upon his request, he was elected to the Board of Directors of
the Boca Raton National Bank, which extended a $500,000 line of credit to Arvida in return for continuation
of Arvida's deposit account with the bank.




55
Steffens said the land in question, 1,423 acres owned by the Fleming
and the Butts families (the former Miss B u t t s is Fleming's wife), was
purchased by Arvida for a total cost of $3.3 million under a purchase
money mortgage agreement providing "very good terms—a 6 percent
note maturing in 1982." The agreement, he said, allowed Arvida to
close the deal without having to resort to bank borrowing. Following
the collapse of the Penn Central, Fleming said he placed a vendor's
lien against the property for protection in the event that Arvida is
unable to meet the note. The lien was later removed.
As indicated above, the original agreement under which the Penn
Central through its wholly-owned subsidiary the Pennsylvania Company, was to have purchased controlling interest in Arvida called for
the final payment to be made in July of 1967. Unwilling to come up
with the necessary cash to do this, Pennsylvania Company's Executive Committee, at its August 28, 1967, meeting, ratified an agreement
whereby final payment would be postponed for another two years.
I t is interesting to note that at this same Pennsylvania Company
Executive Committee meeting, a dividend of $6 million was declared
out of profits for the third quarter of 1967 for common stockholders of
record at the close of business on September 8, 1967, and that an extra
dividend of $1,500,000 was declared out of profits for common stockholders of record as of the close of business September 29, 1967. All
of the common stock of the Pennsylvania Company w^as and is owned
by the Penn Central Transportation Company.
Louis Hector of the First National Bank of Miami, which handled
the Davis estate trust account, said that the trustees of the estate
initially refused to grant an extension of time to the Pennsylvania
Company for final payment. During the course of negotiations, he said,
it was agreed that some cash would be paid, some notes would be
extended, and $3 million, which was the remaining balance, would be
borrowed at the prime rate from the bank. Minutes of the Pennsylvania Company's Executive Committee disclose that the bank loan
was to be paid in a series of installments, the last payment to be made
on January 27, 1969. Hector said the Pennsylvania Company failed
to meet this deadline and that final pyament was delayed until late
1969.
Loan records of First National Bank of Miami show that $200,000
of the $3 million loan was provided by the First Bank and Trust Company of Boca Raton and $50,000 was provided by the University National Bank of Boca Raton. I t should be noted that Thomas Fleming
was Vice Chairman of the Board of Directors of First National Bank
of Miami, Chairman of the Board of both First Bank and Trust and
University National, and a Penphil shareholder at this time.
Fleming also figured in the Pennsylvania Company's successful
effort to have the $3 million note extended from January 27, 1969, to
December 31, 1969. A memorandum to the files of First National Bank
of Miami, dated January 20, 1969, states:
Mr. David Bevan approached Mr. Bassett through Mr. Fleming regarding our willingness to extend the company's $3 million note . . .
until December 31, 1969. . . .

Hector said the only other transaction conducted by First National
of Miami with the Penn Central was to provide the Penn Central with
a $2 million line of credit to back up its commercial paper. He said the




56
Penn Central requested and received a $1 million drawdown on the
line in the spring of 1970, prior to its filing for reorganization. The only
reason the line of credit was extended to the Penn Central, Hector
said, was because Arvida, which was routinely borrowing from the
bank, was controlled by the Penn Central. The $1 million is still owed
the bank.
As noted in P a r t I of this report, Arvida has never paid a cash
dividend on its stock. Consequently, the Penn Central has never
received any return on its Arvida investment except in terms of appreciated value of the shares it holds. Steffens told staff investigators,
"The only thing the Pennsylvania Company ever got from us was a
$500,000 loan which has been repaid."
The Penn Central Transportation Company accounting office said
the loan was made by Arvida to the Pennsylvania Company on August
23, 1967, for a 60-day period at the existing prime rate of 5% percent.
The entire amount of the loan was advanced to the Penn Central
Transportation Company by its wholly-owned subsidiary, the Pennsylvania Company. The accounting office said the funds apparently were
used for working capital.
On October 23, 1967, the Pennsylvania Company repaid $250,000 of
the loan and the remaining balance was finally repaid July 22, 1968,
after a series of extensions.
Steffens said the loanwas made on a routine basis as part of Arvida's
regular efforts to make short-term investments with excess cash. "The
Pennsylvania Company's paper was considered a good investment at
the time", Steffen said.
Aside from benefits to Penphil, made possible through interlocking
relationships with the First Bank and Trust Company and University
National Bank of Boca Raton and the Arvida Corporation, there
appears to be no valid reason for the Penn Central's heavy investment
in Arvida. Financial and investment experts consulted by staff investigators were unanimous in their agreement that investments in
real estate development companies were the last thing the Penn
Central or its subsidiaries should have undertaken if the Railroad was
depending on the cash return from such investments to help sustain it,
as various Penn Central officials have claimed. Real estate development companies require constant and consistently large sums of
money for their own investment and development purposes, and cannot afford to pay out large sums of cash to their benefactors.
HOLIDAY INTERNATIONAL TOURS

Part I I of the staff report—Case Study oj a Penn Central Subsidiary: Executive Jet Aviation—describes the creation and operation
of Executive Jet Aviation (EJA,) a jet plane charter service headquartered in Columbus, Ohio. Founded in 1965, EJA was controlled
and financed by the Penn Central. Loans totaling $21 million were
made to EJA through the American Contract Company, a whollyowned Penn Central subsidiary, and loans totaling $18 milllion were
made to EJA on Penn Central credit by commercial banks with which
the Penn Central maintained deposit and loan accounts.
I n 1968, E J A acquired control of International Air Bahama (IAB),
a supplementary airline flying between Nassau and Luxemburg. E J A
leased to IAB a 707 jet airliner and provided complete flight crews



57
for the craft. Staff investigators found that the E J A - I A B operation
was part of an effort being made by David Bevan, Hodge, and Lassiter
to establish a worldwide air passenger and freight service* backed by
the financial resources of the Penn Central in violation of Civil
Aeronautics Board regulations.
Early in 1968, the same year EJA moved to acquire IAB, Penphil
purchased a 51 percent controlling interest in and provided all of the
initial operating capital necessary for the establishment and operation
of a wholesale travel agency, Holiday International Tours (HIT),
located in Miami. Penphil purchased 51 percent of H I T ' s stock for
$25,500 and made a commitment to provide the travel agency with
a $200,000 line cf credit, $40,000 of which has been utilized. H I T ' s
primary purpose was to serve as general sales agent for IAB passenger tickets. In effect, the arrangement gave control of IAB passenger
sales to Penphil, which was controlled by the same men who controlled
E J A - I A B through the Penn Central namely David Be van and Charles
Hodge. The success of EJA-IAB would have meant automatic success
for Holiday International Tours and a handsome return on Penphil's
investment in the travel agency.
TURNING PENPHIL INTO A CONGLOMERATE

David Be van's dream to turn Penphil into more than "a private
investment club" is detailed in a letter, dated July 31, 1967, sent to
Charles Hodge. I n his letter, Bevan states:
. . . We are thinking of having a large number of shares of Penphil
outstanding and going, you might say, public ultimately with Penphil
and turn it at the same time into an aggressive acquirer of other companies so that we can build it up into a very substantial conglomerate
holding and operating company.

When asked about his brother's proposal for the investment club,
Thomas Bevan said, "That's the way Dave thought. As chief financial
officer of the railroad he was dealing with a big picture and it was
just natural that he would do that with Penphil too." To a question
about what happened to David Bevan's "dreams" for Penphil, Thomas
Bevan said that, "Dave's eyes were bigger than his stomach. He just
didn't have the time needed to expand the scope of Penphil."
The complete letter sent by David Bevan to Charles Hodge follows:
The following letter is just for your information and to give you some
idea as to the current thinking of some of us and no specific action is
requested until we get along a little further.
1—If the outside holders of Florphil agree, we plan to merge Florphil
into Penphil. This is both to simplify the situation and also broaden the
equity bases of Penphil.
2—At the present time I am advised by my brother, Tom, that we
are an exempt investment holding company. We are exempt on the basis
of a limited number of stockholders. Since some of the moves we plan
to make will greatty increase the number of stockholders of Penphil, we
will lose this exemption. We do not desire to become a regulated investment holding company for a number of reasons. To prevent this, Tom
also advises us to acquire some small company and merge it into Penphil
to make Penphil an operating company. It so happens that we may be
in a position to acquire a small debt free industrial company which is
operating on a profitable basis and merge this into Penphil and, if so,
this will be the next step after merging Florphil into Penphil.
3—There appears to be an excellent opportunitj^ for us possibly to
acquire a small mutual fund and if we are able to do this, we will hold
it as a subsidiary of Penphil giving out Penphil stock in exchange.



58
From the foregoing you can see this will gradually broaden the equity
base of Penphil if we are successful and substantially increase the number of shares outstanding. If we follow this program we will eliminate
all limitations on the right of sale of Penphil stock, and actually we are
thinking in terms of having a large number of shares of Penphil outstanding and going, you might say, public ultimately with Penphil and
turn it at the same time into an aggressive acquirer of other companies
so that we can build it up into a very substantial conglomerate holding
and operating company.
If you have any questions or comments, we would be very happy to
have them. Each individual move, of course, will be submitted for specific approval.

The "Florphil" referred to in the letter was a Delaware corporation
formed by Penphil in January, 1967, primarily for the purpose of investing in Florida property. I t existed for little more than one year.
During that time it purchased 8,250 shares of common stock of the
First Bank and Trust Company of Boca Raton at a cost of $214,500
and 1,700 shares of common stock of the University Bank of Boca
Raton for $35,000. (PenphiPs investments in these two banks were
treated in greater detail previously in this report.)
A report from Haskins and Sells, CPA, November 30, 1967, placed
the total market value of the bank shares at $380,750—a paper profit
of 65 percent in 12 months. These were the only investments made b y
Florphil during its history.
Penphil owned 83.75 percent of Florphil and the balance was held by
Lassiter, Manero, Ortlip, Whatley and Davin. These five persons are
the "outside holders of Florphil" referred to in Bevan's letter to
Charles Hodge.
On February 19, 1968, Florphil was merged into Penphil and Penphil issued 1,307 shares of stock to the five "outside holders" in
exchange for the Florphil stock they held. As a result of this transaction, the five "outsiders" became members of Penphil.
I n discussing Florphil with staff investigators, Thomas Bevan said
that Florphil was formed to give Lassiter, Manero, Ortlip, Whatley^
and Davin an opportunity to ally themselves with Penphil's investment program without having to purchase shares of Penphil stock in
amounts equaling the stockholdings of the original Penphil members.
The requirement that all members of Penphil must hold an equal
number of shares was made part of the Penphil by-laws. The requirement, however, was changed by the merger of Penphil and Florphil,
with Penphil being the surviving corporation. With the exception of
Whatley, the Penphil holdings of the former Florphil members never
exceeded 600 shares each. Whatley holds 1,323 shares of Penphil stock.
Further evidence of the effort to greatly expand Penphil into a
major conglomerate is given in an undated, unsigned memorandum
distributed to Penphil shareholders. The memorandum, which was
obtained from the files of Charles Hodge, reads as follows:
PKOPOSAL R E K A N E B , TROPICAL A N D PENPHIL

Steps to be taken—
1. Create a new holding company to be called National Industries
for purposes of this memorandum.
2. National Industries will offer shares of its stock in exchange for
those of Tropical and Kaneb based on their respective markets unless
analyses dictate that some other basis should be used. For example,
if you assume that Tropical is selling at 20 and Kaneb at 15 you might
issue one share of National Industries for each share of Tropical and
54 of a share of National Industries for each share of Kaneb.



59
3. Penphil would transfer its shares of Continental Mortgage to
Florphil in return for a proper number of shares of Florphil; i.e., this
would be based on the liquidating value of Florphil shares vs. current
market for Continental Mortgage.
4. Penphil would also sell requisite number of shares of National
Industries to pay off bank loans and then would liquidate the company
with the net result that each present owner of Penphil would get shares
of Florphil plus shares in the new holding company.
The difficulty with the above is that we lose part of the leverage and
there is probably capital gains tax involved. Against this the following
method might be better:
1. Create a new holding company to be called National Industries
for purposes of this memorandum.
2. National Industries will offer shares of its stock in exchange for
those of Tropical and Kaneb based on their respective markets unless
analyses dictate that some other basis should be used. For example, if
you assume that Tropical is selling at 20 and Kaneb at 15 you might
issue one share of National Industries for each share of Tropical and
% of a share of National Industries for each share of Kaneb.
3. Penphil would transfer its shares of Continental Mortgage to Florphil in return for a proper number of shares of Florphil; i.e., this would be
based on the liquidating value of Florphil shares vs. current market for
Continental Mortgage.
4. Spin off Florphil to present stockholders of Penphil.
5. National Industries offer its shares in exchange for shares of Penphil
as indicated by respective liquidating values.
6. Merge Penphil into National Industries.
On this basis Penphil stockholders would end up with shares of Florphil
and a substantial number of shares of National Industries. Leverage
would be maintained since National Industries would assume the outstanding debt of Penphil in the process of merging Penphil into National
Industries. It does not seem as if there would be any tax liability involved
in any of the foregoing under this plan.

I t should be noted that both David Bevan's letter and the memorandum stress the point of retaining as much control as possible for the
existing stockholders of Penphil while greatly expanding its scope and
power. I t also should be born in mind that the existence of and the
ability of Penphil to expand was due almost entirely to Penphil
interlocking relationships with the Penn Central and its subsidiaries,
both railroad and non-railroad.
DECISION TO KEEP PENPHIL GOING

On August 20, 1970, seventy-nine days after the Penn Central
Transportation filed for reorganization, Penphil stockholders held a
special meeting in Philadelphia and voted to liquidate the investment
club. Only three of the 26 Penphil shareholders were present—
Thomas Bevan, Warren Bodman, and Francis Cannon. Together they
owned a total of 9,900 shares. Their votes, together with 49,160 proxy
votes out of a total of 69,238 outstanding shares, were cast to liquidate Penphil. Bodman, Cannon, Gerstnecker and Thomas Bevan were
elected to form a special committee for liquidation to be completed
within 12 months of the date of the meeting.
When questioned by staff investigators, Thomas Bevan said the
reason for liquidation was the relative inactivity of the company in
terms of acquiring new investments. The most recent investment was
the purchase of stock rights in the First Bank and Trust Company of
Boca Raton, Florida, in 1968.
I t was the August 20, 1970, meeting of Penphil stockholders that
M. A. Chamberlain of Chemical Bank referred to when he said it was
his understanding that Penphil stockholders had voted to liquidate



60
the company. Chamberlain said that the bank had neither suggested
nor asked Penphil to liquidate nor had the bank ever specifically asked
Penphil to make payments on the interest or principal of its loan.
But 46 days later, on October 5, 1970, things had begun to change
in Penphil. On that date a special meeting of Penphil's Board of
Directors was held in Philadelphia. The minutes of that meeting state
in part:
It was indicated that in light of the misleading publicity that the
company had received, it would be for the best interest of the company
if it were not liquidated at this time and that a recommendation rescinding the action taken at the shareholders meeting be mailed to the shareholders together with the appropriate proxy.

The "unfavorable publicity" referred to consisted of press reports
disclosing the interlocking relationships that existed among many of
the Penphil stockholders and Penn Central, and the common investments made by both, a situation which gave rise to suggestions of
insider trading and conflict of interest. Thomas Bevan denied the
existence of either situation to staff investigators. He said that he
was unaware that most of Penphil's investments were held in common
with the Penn Central and that in fact he knew very little about
Penphil's investments. He described himself as a lawyer who had no
interest in the investment field and that bis main if not only function
in Penphil was confined almost completely to keeping the books and
arranging for loans with Chemical and payments on those loans.
The minutes of the October 5, 1970, meeting of the Penphil Board
also state that:
Due to the fact that the Bank [Chemical] had expressed a desire for
payment in reduction of the loan, the sale of the stock of National
Homes and U.S. Freight pledged as security for the loan was authorized.

Penphil records show that $82,407 was deposited to the Penphil
account in Chemical on October 28, 1970, following the sale of National Home stock, and $198,339 was deposited in the Penphil's account in Chemical Bank on October 8, 1970, after the sale of the U.S.
Freight stock. The decision to continue the operation of Penphil the
following December has apparently left some of the company's shareholders with a less than satisfied attitude toward Chemical Bank over
the sale of the two stocks. John May, a member of Thomas Be van's
law firm who is representing his colleague in Penphil matters, said
that the investment club may end its relations with Chemical and
seek credit elsewhere. He added that he did not know what other
financial institution would be a likely prospect.
The special meeting of Penphil stockholders to decide the
future of the company was held in Philadelphia on December 9, 1970.
May said eight or ten shareholders were present and all the remaining
shareholders voted their stock by proxy. The upshot of the meeting
was a nearly unanimous decision to rescind the resolution calling for
the liquidation of Penphil and to continue the company for an indefinite period. Only one shareholder, Hodge, who voted by proxy, was
reported to have been against continuation. When questioned about
this, Hodge said he needed the money because of the deteriorating
Wall Street situation in general and the financial problems of his
investment banking firm in particular.




61
Both May and Thomas Bevan told staff investigators that the
decision to continue Penphil was based on tax considerations, pride of
shareholders who do not want to appear to be running away from the
glare of public attention focused on their company, and because Penphil will become far more active in the future in terms of acquiring
new investments. When questioned further on this point, May admitted that continued existence of the corporation might serve to
protect individual shareholders regarding possible liability in any
litigation that might be initiated by Penn Central stockholders against
Penphil on charges of insider trading and conflict of interest.
Thomas Bevan tendered his resignation as President of Penphil at
the December 9 meeting and was replaced by Samuel Breene. Thomas
Bevan stated that he will no longer participate in the administration
of Penphil, although he intends to retain his stockholdings. Asked why
he had resigned, Bevan said he acted because of publicity and PenphiTs
need for more active direction.
Thomas Bevan has told staff investigators that so far as he is
concerned, it was entirely coincidental that Penphil held common investments with the Penn Central. He stressed that there is no evidence
of insider trading by virtue of the fact that Penphil, with the exception
of its Great Southwest stock, held on to all its investments. He apparently excluded the sale of National Homes and U.S. Freight stock on
the ground that these investments were sold under pressure from
Chemical Bank to reduce PenphiPs outstanding loan balance with
the bank.
I t was pointed out to Thomas Bevan that Penphil held its 10,000share block of Great Southwest stock for a 17-month period during
which the Penn Central controlled Great Southwest.
Bevan replied that the Great Southwest stock was sold at a paper
loss considering the fact that the per share value later rose to a high
point of around $430. At the same time, both he and M a y acknowledged that Penphil made almost a 130 percent profit when the Great
Southwest stock was sold for $377,500 in December 1965.
I t was then pointed out by staff investigators that Penphil could
have controlled Kaneb Pipe Line and Tropical Gas by virtue of the
interlocking relationships these two companies had with Penphil,
Penn Central and Glore Forgan, and by virtue of common investments
held by Penphil and Penn Central in the two companies. Thomas
Bevan answered that there is no evidence that the opportunity for
such dominance by Penphil was ever utilized. He said, "Frankly, I'm
surprised to know that Penphil could have been controlling Tropical
Gas."





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